RBA cuts cash rate to 0.25 per cent

RBA cuts cash rate to 0.25 per cent

20 March 2020

The Reserve Bank has cut the official cash rate to a record low 0.25 per cent from 0.5 per cent, and offered a $90 billion lending facility to banks for small business and announced quantitative easing measures including the purchase of government bonds.

According to a statement from RBA governor Philip Lowe “The coronavirus is first and foremost a public health issue, but it is also 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. 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 and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus.

“At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly,” said Dr Lowe.

At a meeting yesterday, the Reserve Bank Board agreed to the following comprehensive package to support the Australian economy through this challenging period:

  1. A reduction in the cash rate target to 0.25 per cent.
  2. A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.
  3. A term funding facility for the banking system, with particular support for credit to small and medium-sized businesses.

The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent. ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit. They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion.

The Reserve Bank 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. In addition, the RBA will conduct longer-term repo operations of six-month maturity or longer at least weekly, as long as market conditions warrant.

“Australia’s financial system is resilient and well placed to deal with the effects of the coronavirus. 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. 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,” said Dr Lowe.