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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RBA slashes interest rates to 0.25pc in emergency cut amid coronavirus pandemic

The Reserve Bank has cut interest rates to a record low 0.25 per cent and announced extraordinary measures to help prevent a coronavirus-driven recession.

Key points:

  • Australia’s economy continues to deteriorate as panicked investors wipe billions of dollars of value off local stock market
  • The RBA will buy Australian government bonds as part of its first-ever quantitative easing program
  • The Government also announces investment of up to $15 billion to enable smaller lenders to support consumers and small businesses

The RBA will buy Australian government bonds as part of its first-ever quantitative easing program, and provide a three-year funding facility to provide cheap loans for Australian banks.

Australia’s economy continues to rapidly deteriorate, and panicked investors have wiped billions of dollars of value off the local stock market.

In turning to quantitative easing, the central bank is using a lever that it has not used even during some of the worst catastrophes in recent history, including the global financial crisis and the 9/11 terrorist attacks.

Just before the announcement, the Australian dollar plunged to its lowest level since October 2002, trading at 55.08 US cents.

The currency has lost 20 per cent so far this year.

Reserve Bank governor Philip Lowe said the bank would hold the cash rate at 0.25 per cent “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”.

Dr Lowe said the cash rate could be at this level for some years as it was expecting significant job losses.

The latest rate cut was “a substantial easing of monetary policy” and brought the cash rate in line with a number of other countries as a result of actions by the US Federal Reserve, the Bank of England and the Reserve Bank of New Zealand.

“Before the coronavirus hit, we were expecting to make progress towards full employment and the inflation target, although that progress was expected to be only very gradual,” he said.

“Recent events have obviously changed the situation.”

“We are likely to be at this level of interest rates for an extended period.”

Dr Lowe said he was not able to provide an updated set of economic forecasts because “the situation is just too fluid”.

“But we are expecting a major hit to economic activity and incomes in Australia that will last for a number of months,” he said.

“We are also expecting significant job losses.”

RBA to also provide $90 billion in funding to SMEs

The Reserve Bank board typically only meets on the first Tuesday of every month, but with global stock markets in panic because of the COVID-19 pandemic, it held an emergency meeting on Wednesday.

The RBA said it would also provide at least $90 billion at 0.25 per cent over three years to banks if they lend that cash to small and medium-sized businesses. This is similar to an initiative announced by the Bank of England last week.

It came as the Morrison Government announced an investment of up to $15 billion to enable smaller lenders to continue supporting Australian consumers and small businesses.

Treasurer Josh Frydenberg said it would “enable customers of smaller lenders to continue to access affordable credit” and would complement the RBA’s $90 billion term funding facility.

Mr Frydenberg said the Government’s debt agency, the Australian Office of Financial Management, would provide the $15 billion through wholesale funding markets used by small banks and non-bank lenders.

Enabling legislation would be introduced into Parliament next week.

The RBA is moving in the footsteps of other world central banks, including the US Federal Reserve, in buying up government bonds and encouraging consumer spending by printing more money and pumping it into the economy.

Scale of job losses to depend on how flexible employers are

Dr Lowe said the scale of job losses would depend on the ability of businesses to keep workers on.

“We saw during the global financial crisis how flexibility in working arrangements limited job losses and this benefited the entire community,” he said.

It could take time for employment to rise but getting to a 4.5 per cent unemployment rate was a “reasonable estimate” of what he saw as full employment in Australia.

The Reserve Bank would want to see that rate, and be within its inflation target, before changing its position on interest rates, he said.

“I’m really looking forward to those days,” he said.

Dr Lowe hoped that by the end of the year anyone who had lost their job during this crisis would get that job back.

“We are clearly living in extraordinary and challenging times,” he said.

“As our country manages this difficult situation, it is important that we do not lose sight of the fact that we will come through this.”

“At some point, the virus will be contained and our economy and our financial markets will recover.”

RBA willing to do ‘whatever it takes’

Some economists have called on the RBA to do more to save the economy.

Dr Lowe said he would not speculate on other measures, but “nothing’s off the table”.

“We are in extraordinary times, and we are prepared to do whatever is necessary to make sure … the supply of credit is there for Australian businesses and households,” he said.

“We feel like at the moment we’ve done enough. If it turns out not be the case, there are other measures we can consider.

“We will do whatever is necessary … to get us through this difficult period.”

He said the Australian dollar had been the great shock absorber for the economy.

The RBA would not, for the time being, intervene in the foreign exchange market, but would be prepared to if the situation worsened.

In the meantime, there was very close policy coordination between the Australian Government, the Australian Treasury, the Reserve Bank and Australia’s financial regulators.

APRA and ASIC both stand ready to assist institutions to work through regulatory issues arising from the virus, he said.

The Council of Financial Regulators was meeting again on Friday, and would also meet with the largest lenders to discuss how they could support their customers.

Lowe wants Australia ‘well placed’ when pandemic is over

Reserve Bank Governor Philip Lowe delivers an address to the National Press Club in Sydney.

 

Dr Lowe said for now the RBA would not be purchasing bonds directly from the Government, but operating in the secondary market.

The RBA was not seeking to have the three-year yield identically at 25 basis points each and every day.

“How much we need to purchase, and when we need to enter the market, will depend upon market conditions and prices,” he said.

“It may also take some time for yields to fall from their current level to 25 basis points.”

All this was so that “when the health crisis recedes, the country is well placed to recover strongly”.

The bank had already slashed the rate to 0.5 per cent earlier this month.

Commonwealth Bank chief executive Matt Comyn said the bank had expanded support for small businesses and households in response to the RBA announcements.

“We recognise that this is a very concerning time for our customers and the community,” he said.

“These are unprecedented times, and they call for unprecedented measures.”

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