SYDNEY (Reuters) - Australia made a historic foray into quantitative easing on Thursday and cut interest rates for the second time in a month, joining a rush by global central banks to pump cash into the economy as the coronavirus pandemic crushed businesses.
In a statement, the Reserve Bank of Australia (RBA) said it was cutting its cash rate by 25 basis point to a record low 0.25%.
For the first time ever, the RBA announced a bond-buying program and set a target on three-year yields AU3YT=RR at 0.25%.
In a separate statement, the government said it would buy A$15 billion of residential mortgage-backed securities and other asset backed securities over the next 12 months.
“The RBA’s actions are decisive and broader in scope than the market was expecting… In addition to providing the expected 25 bps cash rate reduction, the RBA effectively provided forward guidance that the cash rate will remain unchanged for at least a few years, possibly longer. This statement should help anchor short-dated yields at a generational low. In summary, the RBA’s actions will ensure that the financial system can support the real economy, not just now but when demand growth improves, which will help the recovery process more generally when it occurs.”
“Unconventional monetary policy has enjoyed mixed success overseas. It technically works but not quickly and central banks rarely get much bang for their buck. In the past, these policies have been lucrative for financial assets but the spillovers to the real economy have left something to be desired.”
“We expect home-loan arrears to rise in coming months as the transmission effects of COVID-19 ripple through the broader economy. Pressure on employment is likely to surface in many sectors, particularly tourism, leisure and hospitality and the broader services sector. Across Australian RMBS portfolios, we believe borrower cohorts most exposed to the deterioration in economic conditions are self-employed borrowers. The newly announced support packages and measures will help, but we expect debt-serviceability pressures to surface for many self-employed borrowers, given the major disruptions to business activity.”
“The Reserve Bank of Australia today announced a range of measures to support the economy, but if spreads on corporate bonds continue to widen, it may eventually have to expand its asset purchases to other asset classes. The Bank cut the cash rate target to 0.25% and launched a target for 3-year government bond yields of 0.25% - well below the current yield of 0.47%. The latter decision was taken because the functioning of government bond markets ‘has been impaired’. And while the RBA has previously ruled out launching negative interest rates, that assessment could change as underlying inflation falls further below target and bank lending rates remain high.”
Reporting by Swati Pandey; Editing by Sam Holmes