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Australia Monetary Policy March 2020

Australia: RBA cuts rates to new all-time low and announces quantitative easing in March

At an extraordinary monetary policy meeting held on 19 March, in a bid to tame the economic and financial spillovers from coronavirus (Covid-19), the Reserve Bank of Australia (RBA) decided to cut the cash rate from 0.50% to 0.25%, a fresh all-time low. Moreover, it announced it will boost lending to companies through a three-year funding facility, especially to small- and medium-sized businesses, which will be able to borrow at an interest rate of 0.25%. Lastly, the RBA will purchase three-year Australian government bonds in the secondary market in order to keep yields around 0.25% and thus stabilize government bond markets.

The economy will most likely be hit hard in the short- to medium-term despite policy measures announced in several countries. The outbreak of Covid-19 has weighed heavily on the Australian dollar and has negatively affected the education and travel sector so far, while it is set to hit domestic spending. Looking forward, the Bank announced it will maintain rates at their current all-time low levels until the labor market reaches full employment and inflation rises sustainably within the 2.0%–3.0% target range.

Reflecting on the decision, Robert Carnell, Asia-Pacific head of research at ING, noted:

“As with most central banks, we don’t consider this the end for the RBA, but more likely the beginning in a series of measures to provide support for the government’s fiscal policy, and to help maintain the functioning of the Australian financial system. The RBA will want to see longer dated bond yields come down too, so any further finessing of the policy package may move more in that direction.”

The next monetary policy meeting is scheduled for 7 April.

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