The Reserve Bank of Australia has delivered some financial relief for Australian businesses and homeowners, cutting the cash rate to a new record low of just 0.25 per cent as the coronavirus pandemic threatens to cripple the country’s economy.
The central bank said the virus, which has already sent global markets into freefall, was having a very major impact on the economy and the financial system.
“As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities,” it said.
“The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.”
The out-of-cycle cut comes just weeks after the RBA slashed the rate to 0.5 per cent.
The unprecedented move is in tandem with a Federal Government plan to help keep Australians in jobs and ease the burden on businesses struggling with the economic fallout of COVID-19.
The central bank is also flagged to release other measures to support the economy.
The spread of the virus in Australia and across the world has cemented the likelihood the national economy will fall into recession this year, as consumer spending and productivity slumps.
Financial comparison RateCity’s spokeswoman Sally Tindall said the move meant “some rates could fall as low as 2.25 per cent and the majority of banks will now be offering rates under 3 per cent”.
“These are unprecedented times where some people are looking down the barrel of reduced hours or losing their jobs,” Ms Tindall said.
“This rate cut will hopefully will give some homeowners much-needed relief, however if you do have trouble paying your home loan call your bank straight away to see if they can help.”
RBA SUPPORT MEASURES
The RBA said its priority was to support jobs, incomes and businesses until the health crisis recedes and ensure the country was well placed to recover.
The widely anticipated emergency rate cut means the central bank has also pulled the trigger on its first-ever quantitative easing program in a bid to boost cash supply and encourage lending and investment.
Governor Philip Lowe said the RBA would buy Australian government bonds in the secondary market with a target yield on three-year bonds of about 0.25 per cent.
It will also provide a $90 billion term funding facility for the banking system, with particular support for credit to small and medium-sized businesses. This will be achieved through purchases of government bonds in the secondary market.
Exchange settlement balances at the Reserve Bank will be remunerated at 10 basis points rather than zero as would have been the case under previous arrangements.
This will mitigate the cost to the banking system associated with the large increase in banks’ settlement balances at the Reserve Bank that will occur following these policy actions.
The RBA will also continue to provide liquidity to Australian financial markets by conducting one-month and three-month repo operations in its daily market operations until further notice.
Dr Lowe said Australia’s financial system was resilient and well- placed to deal with the effects of the coronavirus.
“Substantial financial buffers are available to be drawn down if required to support the economy,” he said in a statement.
“The Reserve Bank is working closely with the other financial regulators and the Australian government to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses.”
The Aussie dollar bounced on the announcement, jumping from a near 18-year low of US55.41¢ to US55.82¢.
GOVERNMENT INVESTMENT FOR BUSINESS
Treasurer Josh Frydenberg announced the Government would be investing up to $15 billion to enable smaller lenders to keep offering affordable credit.
“This funding will complement the Reserve Bank of Australia’s announcement of a $90 billion term funding facility for authorised deposit-taking institutions that will also support lending to small and medium enterprises,” Mr Frydenberg said.
“Combined, these measures will support the continued ability of lenders to support their customers and in doing so the Australian economy.”
The Australian Office of Financial Management will be provided with an investment capacity of $15 billion to invest in wholesale funding markets used by small ADIs and non-ADI lenders.
The $15 billion capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12 month period.
Legislation will be introduced next week when Parliament resumes on a pared-back basis.
with AAP and News Corp