Banks offered cheap $200b to help build economy out of recession

The Reserve Bank will offer commercial lenders up to $200 billion in cheap cash to help bolster the recovery from recession with the depth of Australia’s worst economic downturn since the end of World War II to be revealed on Wednesday.

Holding official interest rates at 0.25 per cent, the RBA board on Tuesday surprised markets by extending its term funding facility that enables banks to access low-interest funds that can then flow to small and medium-sized businesses.

RBA to help economy during recession
The Reserve Bank is offering the nation’s banks up to $200 billion to help reduce their costs and boost the economy out of the coronavirus recession by lending to business.

Banks have already drawn down $52 billion under the facility, which was established in March, with RBA governor Philip Lowe saying the total amount now available will be closer to $200 billion. The extra cash will be available between October 1 and June 30 next year.

“The increase and extension to the facility is in response to the ongoing protracted economic weakness and high uncertainty arising from the COVID-19 pandemic,” he said.

Apart from increased lending to businesses, the scheme should help banks keep a lid on interest rates to mortgage customers and replace expensive money borrowed from overseas. It also gives banks the opportunity to buy risk-free government bonds and make a small profit that would also help the states and Canberra reduce their own interest costs.

The move came ahead of the release of the June quarter national accounts, which will confirm the nation’s first recession since 1990-91.

The nation’s economists are tipping a contraction in the quarter of between 5 per cent, forecast by NAB, and 7.2 per cent, which JPMorgan is expecting. That would follow the 0.3 per cent fall in GDP through the first three months of the year.

GDP Forecasts by private economists

The previous record quarterly fall in GDP occurred in June 1974 during the first global oil shock.

Annual growth is also expected to turn negative, to contract between 4.3 per cent and 6.5 per cent. Australia’s worst annual result occurred in 1930, during the depths of the Great Depression, when the economy shrank by an estimated 10 per cent.

The impact of the coronavirus recession was evident in the nation’s trade figures, which showed a current account surplus through the quarter of $17.7 billion, the largest on record.

Exports fell 6.7 per cent, led down by an 8.3 per cent drop in coal sales and a 3.2 per cent slip in LNG sales. Iron ore exports defied the drop to grow by 5.4 per cent.

But imports fell by even more, down 12.9 per cent including a 50.5 per cent collapse in service imports such as tourism. Service imports have fallen to their lowest level since 2003.

Separate figures showed state and federal government spending soared 42.3 per cent in the June quarter to a record $255 billion as programs such as JobKeeper and the coronavirus welfare supplement hit taxpayers’ bank accounts.

Dr Lowe, who said the RBA expects unemployment to reach 10 per cent later this year and remain elevated for an extended period of time, warned the recovery out of recession would be both “uneven and bumpy” with Victoria taking a substantial hit.

He signalled more government support on top of low interest rates would be needed to help the economy.

“Fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment,” he said.

Treasurer Josh Frydenberg, who will hand down the budget on October 6, said the government had already pumped almost $85 billion into the economy directly through programs like JobKeeper.

He urged the states do more, saying they had promised about 2.4 per cent of GDP worth of support measures while the federal government was offering 15.8 per cent.

But shadow treasurer Jim Chalmers said while the government had promised more than $300 billion it was already planning on winding back its support.

“This recession will be deeper and unemployment queues will be longer because the Morrison government is leaving too many people behind in this first recession in three decades,” he said.

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RBA rate cut: Reserve Bank interest rates held at 0.25 per cent

The Reserve Bank has kept Australia’s official cash rate at the historic low of 0.25 per cent, with experts predicting it will remain at that level “for some time”.

At its April meeting this afternoon, the RBA voted to keep interest rates on hold just weeks after it was cut from 0.5 per cent to 0.25 per cent during an unscheduled meeting in mid-March as a result of the escalating coronavirus crisis.

It was the first time a rate cut has been announced outside a regular meeting since 1997, and is a glaring sign of just how severe the situation is becoming.

In a statement, Governor Philip Lowe said the Board had reaffirmed the targets for the cash rate and the yield on three-year Australian government bonds of 25 basis points, as well as the other elements of the package announced on March 19.

“The coronavirus remains first and foremost a very major public health issue, but it is also having very significant effects on economies and financial systems around the world,” he said.

“Many countries are expected to experience large economic contractions as a consequence of the public health response. Large increases in unemployment are also expected.

“Once the virus is contained, a recovery in the global economy is expected, with the recovery supported by both the large fiscal packages and the significant easing in monetary policy that has taken place.”

But he said there were “some signs that markets are working more effectively than they were a few weeks ago” which “partly reflects the substantial measures undertaken by central banks”.

“The co-ordinated monetary and fiscal response, together with complementary measures taken by Australia’s banks, will soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed,” he said.

“These various responses are providing considerable support to Australian households and businesses through what is a very difficult period. The Australian financial system is resilient. “It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy.”

He said the Board was committed to doing what it could to “support jobs, incomes and businesses” as Australia deals with the coronavirus.

“The comprehensive policy package announced last month will also support the expected recovery,” he said.

“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

“The Board wishes the best to all Australians as our country deals with this very difficult situation.”

Most experts had predicted the cash rate would remain untouched today, as board members had already signalled it will likely remain lower bound at 0.25 per cent “for some time”.

“As such, the focus of RBA meetings will be on how the board assesses its QE measures and whether they may require adjusting,” Westpac said in a note on Monday.

CoreLogic’s Head of Research, Eliza Owen, said it was no surprise the RBA had left the cash rate on hold after an “extraordinary March period” in which the cash rate was reduced twice and unconventional monetary policy was introduced.

“The record-low rate of 0.25 per cent may be in place for years to come. No doubt the RBA will be closely monitoring the impact of record low interest rates and other stimulus measures on the economy,” she said.

“To date, the policy announcements from the RBA and other sectors of government have been well received with the overall level of stimulus now getting close to 17 per cent of Australian GDP.”

The RBA Shadow Board, based at The Australian National University, said it was “94 per cent confident that keeping the cash rate on hold is the right policy”.

It said the extraordinary events surrounding the COVID-19 pandemic were “certain to push Australia into recession” for the first time in 28 years, and that efforts by the government and the RBA to stem the economic downturn were “unprecedented”.

But Shadow Board member Dr Timo Henckel said it was tough to determine the impact of those efforts given how quickly the situation was unfolding.

“For example, while the latest official ABS figures show an unemployment rate in Australia of 5.1 per cent, this may well double within a couple of months due to the COVID-19 crisis,” he said.

“It is unclear to what extent the Government’s JobSeeker program will help workers remain attached to their employers.

“Looking ahead six months, the Shadow Board’s vote in favour of keeping the cash rate steady at 0.25 per cent is still very high – 88 per cent.”

Meanwhile, all 23 economists and experts surveyed in the Finder RBA Cash Rate Survey correctly predicted the RBA would hold the cash rate at 0.25 per cent today, after the board indicated it had no appetite to cut further.

RBA rate cut

John Rolfe of Elders Home Loans said not enough time has passed since the latest round of announcements.

“The recent financial support from the Federal and State Governments needs to flow through. The RBA needs to keep its powder dry in case this gets worse,” Mr Rolfe said.

Finder insights manager Graham Cooke said the unfolding coronavirus situation and its impact on the economy would likely have a huge impact on the Australian housing market.

“Many economists tell us they expect property price drops of 10 to 20 per cent,” he said.

“The biggest impact, however, is likely to be on sales volume. With auctioneers forced to allow only one-on-one home visits and virtual auctions, and with many Aussies losing their jobs, it is likely that the housing market will hit the breaks fairly quickly.

“Also, the announcement from banks that many homeowners will be allowed a repayment holiday means that the inevitable glut of homes due to hit the market may not do so all at once.

“The big question is – how long will this last, and how quickly can the market pick up after?

“For would-be first-time buyers with a deposit saved and a secure job – this could be a great opportunity for those who missed out on the property dips in 2019.”

 

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Banks to help commercial landlords who help tenants through COVID19

Australia’s banks will extend the six month deferral of loans, building on the ABA’s Small Business Relief Package, to 30,000 more businesses across the country. 

This support now extends to 98% of all businesses with a loan from an Australian bank.

covid19

 

Businesses with total business loan facilities of up to $10 million (up from the $3 million small business threshold) will now be able to defer repayments for loans attached to their business for six months. These businesses are generally much larger and employ a greater number of people.  

This extension of support will apply to an additional $100 billion of business loans. Combined with measures already announced, it will mean a six-month deferral of loan payments will apply to up to $250 billion worth of loans, with extra cash available to 425,000 businesses to cope with the crisis during the COVID-19 pandemic.  

During this period banks have also agreed to not enforce business loans for non-financial breaches of the loan contract (such as changes in valuations).  

The new measures will apply in all sectors of the economy, and on an opt-in basis, under the conditions that:  

  • For commercial property landlords, they provide an undertaking to the bank that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID19 
  • the customer has advised that its business is affected by COVID-19  
  • the customer was current in terms of existing facilities 90 days prior to applying 
  • interest is capitalised – meaning either the term of the loan is extended or payments are increased after the deferral period. 

“This will help protect many more thousands of small businesses from being evicted if they are struggling to pay the rent as it covers approximately 90% of commercial property owners who have loans with an Australian bank.”   

ABA CEO Anna Bligh

Australian Banking Association CEO, Anna Bligh said “as this crisis has deepened and more businesses are affected we are building on the Small Business Relief package to ensure more businesses are given a lifeline to help them survive through the coronavirus pandemic ,” Ms Bligh said.  

“Banks are expanding their support to an extra 30,000 thousand businesses by raising the threshold of those who qualify for the six month deferral of loan repayments from $3 million to up to $10 million in total loan facilities.  

“The type of businesses this applies to includes commercial landlords of properties such as local shopping centres, pubs, clubs and restaurants, who must agree not to terminate leases or evict current tenants for rent arrears due to COVID19 in order to access support.  

“This will help protect many more thousands of small businesses from being evicted if they are struggling to pay the rent as it covers approximately 90% of commercial property owners who have loans with an Australian bank.   

“Where landlords within this threshold do the right thing by their tenants, banks will do the right thing by them. 

“When combined with the previous small business assistance announced just over a week ago, this means $250 billion worth of loans covered are able to access a six month deferral of payments, which means dollars staying in the pockets of businesses throughout this crisis,” Ms Bligh said.   

Businesses with total loans of more than $10 million may also be eligible for relief, but this will need to be considered on a case by case basis as they are often much more complex in their structure. 

Banks have developed this relief package following discussions with APRA and ASIC to provide the appropriate regulatory treatment. 

This measure is announced subject to authorisation from the ACCC. 

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