COVID-19 and the Economy
The COVID-19 pandemic is primarily a public health issue, but it is also having a major impact on the economy and the financial system. In response to the pandemic, countries have restricted the movement of people across borders and implemented social distancing measures. 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 primary response to the virus is to manage the health of the population, but other arms of policy, including monetary policy, play an important role in reducing the economic and financial disruption resulting from the virus. The Reserve Bank is committed to do what it can to support jobs, incomes and businesses in Australia.
How the Reserve Bank is Supporting the Economy
The Reserve Bank has put in place a comprehensive set of monetary policy measures to lower funding costs and support the supply of credit to the economy.
Lower the Cash Rate Target to 0.1 Per cent
The Reserve Bank Board reduced the cash rate twice in March 2020, to 0.25 per cent, and to 0.1 per cent on 3 November 2020. This is boosting the cash flow of businesses and the household sector as a whole. It is also helping Australia’s trade-exposed industries through the exchange rate. At the same time, low interest rates do have negative consequences for some people, especially those relying on interest income. The Reserve Bank Board has discussed these consequences, but the evidence is that lower interest rates do benefit the community as a whole.
The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.
Target for the April 2024 Australian Government Bond Yield of Around 0.1 Per cent
Over recent decades, the Reserve Bank has targeted the overnight cash rate. The Bank has extended this by also targeting a risk-free interest rate further out along the yield curve to help lower funding costs across the economy. On 19 March 2020, the Board announced a target for the yield on the 3-year Australian Government bond of around 0.25 per cent and reduced this target to around 0.1 per cent on 3 November 2020. On 6 July 2021, the Board announced that the yield target would continue to apply to the then-current 3-year Australian Government bond – the April 2024 bond – rather than roll to a later-maturity bond.
The Bank stands ready to purchase government bonds to help achieve this target. The Bank purchases government bonds in the secondary market, and does not purchase bonds directly from the government.
Government Bond Purchase Program
The Reserve Bank announced on 3 November 2020 that it would purchase bonds issued by the Australian Government and by the states and territories in the secondary market under a $100 billion bond purchase program. On 2 February 2021, the Bank announced that it would purchase an additional $100 billion of government bonds following completion of the initial bond purchase program in April 2021. On 6 July 2021, the Bank announced that it would continue purchases of government bonds following completion of the second $100 billion of bond purchases in early September 2021, at a rate of $4 billion per week until at least 11 November 2021. Together with the target on the April 2024 Australian Government bond, these bond purchases help lower the whole structure of interest rates in Australia. This helps to support the economy through the normal transmission mechanisms of monetary policy, including lower borrowing costs and a lower exchange rate than otherwise.
Provide a Term Funding Facility for the Banking System, to Support Lending to Businesses
The objectives of the Reserve Bank’s term funding facility (TFF) are to lower funding costs for the entire banking system to lower the cost of credit to households and businesses, and to provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses. The TFF was announced on 19 March 2020, and an increase and extension of the TFF was announced on 1 September 2020. On 3 November the interest rate on the TFF was reduced from 0.25 per cent to 0.1 per cent. On 30 June 2021 the TFF closed to new drawdowns as scheduled. As the facility has provided low-cost fixed-rate funding for 3 years it will continue to support low borrowing costs until mid 2024.
Under the TFF, authorised deposit-taking institutions (ADIs) had access to new funding from the Reserve Bank for three years at an interest rate substantially below their funding costs. Access to new funding included an additional allowance associated with an ADI’s growth of business credit. For every extra dollar of loans by ADIs to small and medium-sized businesses, ADIs had access to an additional five dollars of funding from the Reserve Bank. For every extra dollar lent to large businesses, ADIs had access to an additional dollar of funding.
The Australian Government is supporting the markets for asset-backed securities through the Australian Office of Financial Management (AOFM). This support is important as it helps non-bank financial institutions and small lenders to continue to provide credit to Australian households and businesses.
- Monetary Policy Decisions (particularly the decisions announced on 2 February 2021, 3 November 2020, 1 September 2020 and 19 March 2020)
- Minutes of the Monetary Policy Meetings of the Reserve Bank Board (particularly the meetings on 2 February 2021, 3 November 2020, 1 September 2020 and 18 March 2020)
- Speeches by the Governor (particularly the speeches on 3 February 2021, 3 November 2020, 15 October 2020, 21 July 2020 and 19 March 2020).
- Speeches by the Deputy Governor (particularly the speeches on 24 November 2020, 22 September 2020 and 30 June 2020).
- Statement on Monetary Policy – February 2021
- Term Funding Facility Overview
- Market announcement on 3 November 2020: Term Funding Facility – Reduction in Interest Rate to Further Support the Australian Economy
- Market announcement on 1 September 2020: Term Funding Facility Increase and Extension to Further Support the Australian Economy
- Market announcement on 19 March 2020: Term Funding Facility to Support Lending to Australian Businesses
- Term Funding Facility Operational Notes
- The Reserve Bank publishes in Statistical Table A3 weekly data on total TFF drawings and monthly data on the total TFF Funding Allowance and Additional Allowance accruing from lending to small and medium-sized enterprises and large businesses
- The Term Funding Facility, RBA Bulletin, December 2020
- AOFM’s Structured Finance Support Fund.
How the Reserve Bank is Supporting the Functioning of Financial Markets
To support the economy, it is crucial that the financial system remains stable and that markets remain orderly. The Reserve Bank announced measures to provide liquidity to financial markets in response to the disruptions in March 2020.
Provide Liquidity to the Financial System
The Reserve Bank injected substantial extra liquidity into the financial system through its daily market operations. In March 2020, the Bank announced it would conduct regular one-month, three-month and six-month maturity repurchase operations as long as market conditions warranted. In April 2020, the Bank announced that daily open market operations were likely to be on a smaller scale in the near term given the substantial liquidity already in the system and the commencement of the Term Funding Facility.
To assist with the smooth functioning of Australia’s capital markets, the Bank decided in May 2020 to broaden the range of eligible collateral for the Bank’s domestic market operations to include Australian dollar securities issued by non-bank corporations with an investment grade credit rating.
Provide Liquidity to the Government Bond Market
The Reserve Bank stands ready to adjust the pace and composition of purchases of Australian Government bonds and semi-government securities in the secondary market to support its smooth functioning, if necessary. The government bond market is a key market for the Australian financial system, because government bonds provide the pricing benchmark for many financial assets. The Bank is working in close cooperation with the AOFM.
Establish a Foreign Exchange Swap Line to Support US Dollar Funding
The Reserve Bank and the US Federal Reserve have established a temporary swap line for the provision of US dollar liquidity. The swap line allows the Reserve Bank to access up to US$60 billion in exchange for Australian dollars. The US dollars can be made available to financial institutions operating in Australia via repos with the Reserve Bank.
How the Reserve Bank is Supporting the Supply of Banknotes
The Reserve Bank is closely monitoring changes to banknote demand and is in regular contact with the banknote distribution network, including banks and cash transportation companies, to ensure the Reserve Bank is able to meet the needs of the Australian public.
The Reserve Bank holds ample supply of banknotes. The Bank has contingency reserves to meet extreme events such as a pandemic, and stands ready to supply banknotes as required. The Bank holds several years of stock to be able to meet any increase in demand, and can print more at the Bank’s printworks in Melbourne if required.
The Reserve Bank has been working with its distribution network to supply banknotes to some locations where temporary shortages are more likely to emerge due to short-term increases in demand.
Cooperation with the Australian Government and Other Agencies
The Reserve Bank is working closely with the Australian Government, the Australian Treasury and Australia’s financial regulators on the coordinated response to COVID-19.
Early in the pandemic, the financial regulators adjusted the timing of various regulatory initiatives to allow financial institutions to concentrate on their businesses and work with their customers.