Economics & Markets

More action out of the RBA this month to support the economy

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

At its September board meeting, the RBA left interest rates on hold, which was no big surprise.

The surprise was in the RBA’s announcement of an extension and increase of the cheap funding it provides to the banks. You might recall back in March, the RBA announced a term funding facility, under which it would provide cheap loans to the banks, locked in for a period of three years at .25%. This in turn enables the banks to provide cheap loans to households and businesses.

The RBA will be extending that facility to the middle of next year and increasing it to $200 billion. The previous arrangement applied until the end of September, for about $80-90 billion. This could work towards providing confidence that cheap funding will continue.

At its meeting, the RBA also said the economic recovery in Australia is uneven and uncertain, and it’s likely to be bumpy. Obviously so far the biggest setback is in Victoria, and that is weighing on the RBA’s assessments. Consistent with that, the RBA again said it is willing to do more and do what it can. It also said it won’t be raising interest rates until inflation is headed back towards target, and Australia makes strides towards full employment.

The RBA may do more in the months ahead. It could cut the cash rate to 0.1%, although that might not have a huge impact. It could also pump more money into the economy via quantitative easing, buy more government bonds, or ease its forward guidance. However at the moment, we think the bulk of action is likely to be in fiscal policy, out of Canberra.

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