Australia’s Central Bank Boosts Facility, Considers Other Steps

(Bloomberg) -- Australia’s central bank expanded a lending facility for banks as it kept key policies unchanged Tuesday, and signaled a renewed willingness to explore additional measures to boost an economy still mired in recession.

“The board will maintain highly accommodative settings as long as is required,” Reserve Bank chief Philip Lowe said after keeping both the cash rate and three-year yield target unchanged at 0.25%. In an addition to the key final paragraph of guidance, the governor added that it “continues to consider how further monetary measures could support the recovery.”

Under the increased Term Funding Facility, banks will have access to additional funding equivalent to 2% of their outstanding credit, at a fixed rate of 25 basis points for three years. They will be able to draw on this up until the end of June 2021, it said. Lenders have so far drawn A$52 billion ($38.5 billion) and today’s change brings the total available to around A$200 billion, Lowe said.

The RBA is coordinating with the government’s wide-ranging stimulus program by keeping rates near zero and purchasing bonds to keep borrowing costs down across the economy. The central bank has bought about A$60 billion of government securities since it initiated the bond-buying program in March and Lowe said more will be undertaken as needed.

‘Very Important’

Gareth Aird, senior economist at Commonwealth Bank of Australia, said Lowe’s addition to the final paragraph was very important.

“This is the closest that we have been since the emergency mid‑March board meeting to the governor signaling that more monetary easing could be on the offering in his post meeting statements,” he said. “We do not know what form additional easing may take. And we don’t think that more easing is imminent. But it does suggest a slight shift in the governor’s thinking.”

Markets took little interest in the TFF’s expansion or Lowe’s signal. The Australian dollar was little changed after the release and traded at 74.04 U.S. cents at 4:27 p.m. in Sydney.

Lowe, in a July speech, highlighted a discussion at that month’s policy meeting on alternative options to those undertaken by the central bank in March. These included:

• The various interest rates currently at 25 basis points could have been set lower, at say 10 basis points
• It would also have been possible to introduce a program of government bond purchases beyond that required to achieve the 3-year yield target; and
• Different parameters could have also been chosen for the Term Funding Facility

While the governor said the board had concluded there was no need to adjust its package, he added it hadn’t ruled out future changes to the package’s configuration.

Currency Troubles

The governor, in today’s policy statement, also highlighted the appreciation of the currency and that it was now near a two-year high. The Aussie dollar has surged almost 30% from a March low, causing greater discomfort for the nation’s exporters.

Negative rates have been floated as an option to help take pressure off the currency. Bill Evans, chief economist at Westpac Banking Corp., maintains the “risk/reward tradeoff” of such a move is attractive Down Under given “the currency effect on a small open economy with large foreign debt.”

While parts of Australia have reopened for business, Victoria’s outbreak and renewed lockdown has damaged confidence and shut state borders. The RBA reckons that, as a result, unemployment is set to hit 10% later this year and the national economy is unlikely to grow in the current quarter.

Data Wednesday is expected to show gross domestic product plunged 6% in the second quarter after dropping 0.3% in the first, meeting the technical definition of a recession.

What Bloomberg’s Economists Say:

“The resurgence of the virus and lockdown in Victoria has hampered Australia’s rebound, and subsequently expanded the size and duration of policy measures required to support the recovery. In keeping with this, the RBA’s decision to provide additional support -- both time and funding -- to lenders enhances the financial system’s ability to absorb the additional impacts of the virus on Australia’s economy. At the same time, additional low-cost funding to banks reduces financial stability risks by removing funding pressure from wholesale funding markets.”

James McIntyre, economist

On the upside, China’s stimulus is driving commodity prices higher, bringing a windfall to the Australian economy, and consumer spending has remained buoyant, underpinned by the government’s cash support and early access to retirement savings.

©2020 Bloomberg L.P.