Australia Cuts Key Rate; Unveils Asset Purchase Program

As the economic recovery is expected to be bumpy, Australia’s central bank unveiled a package of measures to support job creation and underpin growth.

The policy board of the Reserve Bank of Australia headed by the governor Philip Lowe decided on Tuesday to lower its key cash rate by 15 basis points to a record low of 0.10 percent.

The bank also decided to cut the target for the yield on the 3-year Australian Government bond to around 0.1 percent and to purchase A$100 billion government bonds of maturities of around 5 to 10 years over the next six months.

Further, the bank will reduce the interest rate on new drawings under the Term Funding Facility to 0.1 percent and cut the interest rate on Exchange Settlement balances to zero.

The longer-dated bonds will be purchased with an expected 80:20 split. These will be purchased from the secondary market through regular auction.

The bank said today’s decision will assist the recovery by lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets.

Policymakers observed that addressing the high rate of unemployment as an important national priority.

The bank noted that the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria. However, it will take some time to reach the pre-pandemic level of output.

According to RBA, economic growth is expected to be around 6 percent over the year to June 2021 and 4 percent in 2022.

The unemployment rate is expected to remain high, but to peak at a little below 8 percent, rather than the 10 percent expected previously. At the end of 2022, the unemployment rate is forecast to be around 6 percent.

Given the outlook, the Board is not expecting to increase the cash rate for at least three years. The bank said it is prepared to do more if necessary.

Even though the bank turned more optimistic about the economic outlook, Marcel Thieliant, an economist at Capital Economics said he suspects it will expand its government bond purchases beyond the planned six months.

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