Two new facilities to support lending worth a combined $105 billion are key elements of the Reserve Bank of Australia and federal government’s plans to support the economy in response to COVID-19, while the RBA cut rates to 0.25 per cent and promised an unprecedented target on government bond yields.
After an emergency meeting, the RBA revealed a $90 billion, three-year funding facility for banks, where they will have access to loans equalling up to 3 per cent of outstanding credit.
The RBA will offer further cash for banks that increase lending to small and medium-sized businesses.
For every $1 loaned to large businesses, banks will have access to $1 from the RBA, and for every $1 lent to small businesses, there will be $5 of support.
The overnight cash market interest rate was reduced by 25 basis points to 0.25 per cent.
The RBA also announced a yield target on three-year Commonwealth bonds of 0.25 per cent, with the bank to buy bonds to hit the target.
“We’ve done all we can on the cash rate so we’ve got to look elsewhere now,” RBA governor Philip Lowe said.
He said three-year Commonealth bonds had traded at an average rate of 0.45 per cent in the past month.
“Many people will view this as quantitative easing,” Mr Lowe said.
“Our emphasis is not on the quantities, not on the quantity of bonds we’ll buy.
“Rather than quantities, or the size of our balance sheet, our objective is to focus on the price of money and credit.
“We are prepared to transact in whatever quantity is needed to meet this (yield) target.”
But he cautioned the bank would be buying those bonds in the secondary market, not directly from the government.
Dr Lowe said the COVID-19 would be a temporary shock, and that the economy would rebound after the health crisis was over.
He said it was critical that the country did not lose otherwise viable businesses during the downturn, as that would put a dent in the recovery.
“Australia's financial system is resilient and well placed to deal with the effects of the coronavirus.” Dr Lowe said.
“The banking system is well capitalised and is in a strong liquidity position.
“Substantial financial buffers are available to be drawn down if required to support the economy.”
Government
The federal government also promised $15 billion to support smaller lenders, which will be undertaken through the Australian Office of Financial Management.
That would include buying asset-backed securities, such as residential mortgage-backed securities.
"The $15 billion capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12-month period,” Treasurer Josh Frydenberg said.
Mr Frydenberg also said he had been working with banks to ensure they kept the taps open for lending.
“It’s in the bank’s interest, it’s in the economy’s interest, it’s in Australia’s interest,” he said.
Mr Frydenberg said the response had been coordinated with the RBA, and would inject more than $100 billion into the Australian financial system.
Prime Minister Scott Morrison said the government’s position was to build a bridge through the health crisis to a point where the economy was rebounding.
He also confirmed the government was working on a new welfare payment at a higher rate to support workers who lose their job through a downturn.
