Supporting the Economy and Financial System in Response to COVID-19

COVID-19 and the Economy

The COVID-19 pandemic is primarily a public health issue, but it is also having a major impact on the economy and the financial system. In response to the pandemic, countries have restricted the movement of people across borders and implemented social distancing measures. The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.

The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary policy, play an important role in reducing the economic and financial disruption resulting from the virus. The Reserve Bank is committed to do what it can to support jobs, incomes and businesses in Australia.

How the Reserve Bank is Supporting the Economy

The Reserve Bank has put in place a comprehensive set of monetary policy measures to lower funding costs and support the supply of credit to the economy.

Lower the Cash Rate Target to 0.1 Per cent

The Reserve Bank Board reduced the cash rate twice in March 2020, to 0.25 per cent, and to 0.1 per cent on 3 November 2020. This is boosting the cash flow of businesses and the household sector as a whole. It is also helping Australia's trade-exposed industries through the exchange rate. At the same time, low interest rates do have negative consequences for some people, especially those relying on interest income. The Reserve Bank Board has discussed these consequences, but the evidence is that lower interest rates do benefit the community as a whole.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

Target a 3-year Australian Government Bond Yield of Around 0.1 Per cent

Over recent decades, the Reserve Bank has targeted the overnight cash rate. The Bank has extended this by also targeting a risk-free interest rate further out along the yield curve to help lower funding costs across the economy. On 19 March 2020, the Board announced a target for the yield on the 3-year Australian Government bond of around 0.25 per cent and reduced this target to around 0.1 per cent on 3 November 2020.

The Bank stands ready to purchase government bonds to help achieve this target. The Bank purchases government bonds in the secondary market, and does not purchase bonds directly from the government.

Government Bond Purchase Program

The Reserve Bank announced on 3 November 2020 that it would purchase bonds issued by the Australian Government and by the states and territories in the secondary market under a $100 billion bond purchase program, focussing on bonds with maturities of 5 to 10 years. On 2 February 2021, the Bank announced that it would purchase an additional $100 billion of government bonds when the current bond purchase program is completed in April 2021. These additional purchases will be at the current rate of $5 billion a week. Together with the target on the 3-year Australian Government bond, these bond purchases help lower the whole structure of interest rates in Australia. This helps to support the economy through the normal transmission mechanisms of monetary policy, including lower borrowing costs, a lower exchange rate than otherwise and higher asset prices.

Provide a Term Funding Facility for the Banking System, to Support Lending to Businesses

The objectives of the Reserve Bank's term funding facility (TFF) are to lower funding costs for the entire banking system so that the cost of credit to households and businesses is low, and to provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses. The TFF was announced on 19 March 2020, and an increase and extension of the TFF was announced on 1 September 2020. On 3 November the interest rate on the TFF was reduced from 0.25 per cent to 0.1 per cent.

Under the TFF, authorised deposit-taking institutions (ADIs) have access to funding from the Reserve Bank for three years at an interest rate substantially below their funding costs. Access to funding includes an additional allowance associated with an ADI's growth of business credit. For every extra dollar of loans by ADIs to small and medium-sized businesses (those with turnover below $50 million), ADIs have access to an additional five dollars of funding from the Reserve Bank. For every extra dollar lent to large businesses, ADIs have access to an additional dollar of funding.

The Australian Government is supporting the markets for asset-backed securities through the Australian Office of Financial Management (AOFM). This support is important as it helps non-bank financial institutions and small lenders to continue to provide credit to Australian households and businesses.

How the Reserve Bank is Supporting the Functioning of Financial Markets

To support the economy, it is crucial that the financial system remains stable and that markets remain orderly. The Reserve Bank announced measures to provide liquidity to financial markets in response to the disruptions in March 2020.

Provide Liquidity to the Financial System

The Reserve Bank injected substantial extra liquidity into the financial system through its daily market operations. In March 2020, the Bank announced it would conduct regular one-month, three-month and six-month maturity repurchase operations as long as market conditions warranted. In April 2020, the Bank announced that daily open market operations were likely to be on a smaller scale in the near term given the substantial liquidity already in the system and the commencement of the Term Funding Facility.

To assist with the smooth functioning of Australia's capital markets, the Bank decided in May 2020 to broaden the range of eligible collateral for the Bank's domestic market operations to include Australian dollar securities issued by non-bank corporations with an investment grade credit rating.

Provide Liquidity to the Government Bond Market

The Reserve Bank stands ready to adjust the pace and composition of purchases of Australian Government bonds and semi-government securities in the secondary market to support its smooth functioning, if necessary. The government bond market is a key market for the Australian financial system, because government bonds provide the pricing benchmark for many financial assets. The Bank is working in close cooperation with the AOFM.

Establish a Foreign Exchange Swap Line to Support US Dollar Funding

The Reserve Bank and the US Federal Reserve have established a temporary swap line for the provision of US dollar liquidity. The swap line allows the Reserve Bank to access up to US$60 billion in exchange for Australian dollars. The US dollars are made available to financial institutions operating in Australia via repos with the Reserve Bank.

How the Reserve Bank is Supporting the Supply of Banknotes

The Reserve Bank is closely monitoring changes to banknote demand and is in regular contact with the banknote distribution network, including banks and cash transportation companies, to ensure the Reserve Bank is able to meet the needs of the Australian public.

The Reserve Bank holds ample supply of banknotes. The Bank has contingency reserves to meet extreme events such as a pandemic, and stands ready to supply banknotes as required. The Bank holds several years of stock to be able to meet any increase in demand, and can print more at the Bank’s printworks in Melbourne if required.

The Reserve Bank has been working with its distribution network to supply banknotes to some locations where temporary shortages are more likely to emerge due to short-term increases in demand.

Cooperation with the Australian Government and Other Agencies

The Reserve Bank is working closely with the Australian Government, the Australian Treasury and Australia's financial regulators on the coordinated response to COVID-19.

The financial regulators are examining how the timing of various regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and work with their customers. As part of this, the Reserve Bank has put on hold the Review of Retail Payments Regulation to reduce the demands on industry stakeholders at a time when they are focused on dealing with the impact of COVID-19.