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

COVID-19 and the Economy

The outbreak of COVID-19 is primarily a public health issue, but it is also having a major impact on the economy and the financial system. As the virus has spread, 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.

At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.

How the Reserve Bank is Supporting the Economy

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

Lower the Cash Rate Target to 0.25 Per cent

The Reserve Bank Board reduced the cash rate twice in March 2020, to 0.25 per cent. 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 also announced that it 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.

Target a 3-year Australian Government Bond Yield of Around 0.25 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. The Board announced a target for the yield on 3-year Australian Government bonds of around 0.25 per cent, to help lower funding costs across the economy.

The Bank stands ready to purchase Australian Government bonds across the yield curve to help achieve this target. The Bank purchases Government bonds in the secondary market, and does not purchase bonds directly from the Government.

The Bank expects to maintain the target for three-year yields until progress is being made towards the Bank's goals of full employment and the inflation target. The Bank's expectation, though, is that the yield target will be removed before the cash rate is increased.

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

The objectives of the 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.

Under the TFF, authorised deposit-taking institutions (ADIs) in total have access to around $200 billion in funding from the Reserve Bank. The funding is for three years at a fixed interest rate of 0.25 per cent, which is substantially below ADIs' 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 has announced measures to provide liquidity to financial markets in response to the recent disruptions.

Provide Liquidity to the Financial System

The Reserve Bank has been injecting 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 purchase Australian Government bonds and semi-government securities in the secondary market to support its smooth functioning. 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.