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Economics & Markets

What the RBA’s response to COVID-19 means for the Australian economy

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Sydney, Australia

The Reserve Bank of Australia (RBA) met today and agreed to a support package for the Australian economy, through the challenging period that is the COVID-19 outbreak.

The central bank acknowledged this is, first and foremost, a health issue, and that the primary response is to manage the health of the population. 

As the RBA said, other arms of policy play an important role in reducing economic and financial disruption. Here are some initial thoughts on what the RBA agreed to today:

1. A reduction in the cash rate target to 0.25 per cent.

That’s another 0.25 per cent reduction. This is another historic low, and I suspect it will be the bottom.

2. A target for the yield on three-year Australian government bonds of around 0.25 per cent.

This is aimed at lowering the longer-term funding costs in the economy, because many of those funding costs are priced off three-year bond yields.

3. A term funding facility for the banking system, with support for credit to small and medium-sized businesses.

This is basically a lending facility for banks, so the banks can borrow from the Reserve Bank at a very low interest rate. They can borrow that money, up to three per cent of their credit initially, and use that to fund lending. If they want to borrow additional amounts, they have to provide commitment they will lend to business, particularly small and medium business.

Other thoughts for now

This is quite a substantial easing in monetary policy. The RBA has reiterated a focus on reducing the pain to business and households from the Coronavirus, and that the impact of the government’s shutdown is kept to a minimum. Its measures are designed for securing jobs, income and keeping businesses operating.

Although this is not enough to stop a recession, the Australian authorities are moving in the right direction on this issue, and would have more up their sleeve.

As mentioned, the focus is on recovery, and to stop the impact of the virus from getting too big.

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Shane Oliver, Head of Investment Strategy & Economics and Chief Economist
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