SYDNEY – At its meeting on Tuesday, the Board reiterated targets for the Australian cash and three-year government bond yields of 25 basis points, as well as other elements of the package announced on March 19, 2020.
Coronavirus remains the first and foremost important public health problem, but it also has a very significant effect on the economy and financial systems throughout the world.
Many countries are expected to experience large economic contractions as a consequence of the public health response. A large increase in unemployment is also expected. After the virus is contained, a recovery in the global economy is expected to be supported by a large fiscal package and significant monetary policy easing.
Financial market volatility has historically been high and many markets throughout the world have been dislocated. However, there are some signs that the market is working more effectively than a few weeks ago. This increase partly reflects the substantial steps taken by the central bank.
In Australia, three-year Australian government bond yields are now around the target level set by the Board and the functioning of the government bond market has increased. The bank will do what is necessary to achieve the three-year yield target.
Targets are expected to remain in place until progress is made towards goals for full employment and inflation. Since this target was introduced, the central bank has bought around $ 36 billion in government bonds on the secondary market, including bonds issued by states and territories. The Bank will continue to promote the smooth running of these important markets. However, if conditions continue to improve, the possibility of purchasing smaller and less frequent government bonds is needed.
The Bank has injected large liquidity into the financial system through daily open market operations to support credit and maintain low funding costs in the economy. This will continue to ensure that the financial system has sufficient liquidity. Given the substantial liquidity that already exists in the system and the start of the Term Funding Facility, daily open market operations are likely to be on a smaller scale in the near future. Longer-term operations will continue, but the frequency of these operations will be adjusted as needed according to market conditions.
The first drawing based on the Term Funding Facility was made yesterday. This facility will help reduce funding costs throughout the banking system and provide incentives for lenders to support credit for businesses, especially small and medium businesses. Official savings providers have access to at least $ 90 billion in funding under this facility.
There is a lot of uncertainty about the short-term prospects for the Australian economy. Much will depend on the success of the virus countermeasure effort and how long social distance measures need to remain. However, a very large economic contraction is expected to be recorded in the June quarter and the unemployment rate is expected to rise to its highest level in years.
Coordinated monetary and fiscal responses, together with complementary steps taken by Australian banks, will soften the expected contractions and help ensure that the economy is in the right position to recover after the health crisis has passed and restrictions removed. These responses provided considerable support to Australian households and businesses through an extremely difficult period. Australia’s financial system is resilient. This is well capitalized and in a strong liquidity position, with this financial buffer available to withdraw if needed to support the economy.
The Board is committed to doing what can be done to support work, income and business when Australia deals with the corona virus. The comprehensive policy package announced last month will also support the expected recovery. The board will not increase its cash rate target until progress is made towards full employment and is confident that inflation will continue within the target range of 2-3 percent.
The Council wishes the best for all Australians because our country faces this very difficult situation.
(Reporting by Wayne Cole, Editing by Sherry Jacob-Phillips)
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