Australia Retains Key Rate & QE, Expands Bank Funding Programme

Australia’s central bank retained its interest rate at a record low and quantitative easing unchanged but increased the size of the Term Funding Facility to keep interest rates lower for borrowers.

The board of Reserve Bank of Australia, governed by Philip Lowe, decided on Tuesday, to maintain cash rate and the targeted yield on three-year government bonds of 25 basis points.

Under the expanded Term Funding Facility, authorized deposit-taking institutions will have access to additional funding, equivalent to 2 percent of their outstanding credit, at a fixed rate of 25 basis points for three years.

Today’s decision to expand term funding facility would raise the total amount available under the facility to around A$200 billion.

The RBA had reduced the key interest rate to the current record low of 0.25 percent at the March meeting. Also in March, the bank had introduced asset purchase programme to combat the downturn caused by the pandemic.

The Board said it will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery.

The RBA’s decision to expand its Term Funding Facility which should contribute to continued strong growth in the money supply, Marcel Thieliant, an economist at Capital Economics, said.

Given that 10-year yields have crept higher recently, the Bank is likely to try to lower longer-term yields by expanding its bond purchases next year, the economist added.

The announcement came ahead of the release of quarterly national accounts on September 2. Economists forecast the economy to contract 6 percent sequentially in the second quarter.

Policymakers said that economic downturn caused by the coronavirus pandemic is not as severe as earlier expected and a recovery is now under way in most of Australia.
However, the recovery is likely to be both uneven and bumpy, with the virus outbreak in Victoria having a major effect on the Victorian economy.

The virus outbreak in Victoria and subdued growth in aggregate demand more broadly suggests that it is likely to be some months before a meaningful recovery in the labor market is under way, the bank said.

In the Bank’s central scenario, the unemployment rate would rise to around 10 percent later in 2020 and then declines gradually to be to still around 7 percent in two years’ time.

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