Years of easy money

Ian Rogers
Monetary medicine is being flung all about the banking system in the name of saving business, jobs, income and an Australian way of life.

In an epic afternoon yesterday, the Treasury, then RBA and then APRA spelled out their coordinated dose, all in the context of the cascading COVID-19 crisis. The major measures are:

  • the RBA's cash rate target has dropped 25 bps to 0.25 per cent, the lower bound;
  • a Term Funding Facility of $90 billion "to support lending to Australian businesses" and open to most (but not all) ADIs;
  • on budget (borrowed) direct investment via the AOFM in the senior, structured and warehouse debt of small banks, credit unions and fintechs;
  • a form of QE or Yield Curve Control that will anchor the three-year bond rate at 0.25 per cent and the RBA will pull the leash on long bonds too.

In the speech of his life, Philip Lowe, the Reserve Bank governor, surveyed the dilemmas facing policy makers and projected (surely, misplaced) confidence in the aid the cash rate cut and other measures will soon deliver Australian businesses and households.

The "further reduction in the cash rate to 0.25 per cent brings the cumulative decline over the past year to 1.25 percentage points," since April last year, Lowe pointed out.

"This is a substantial easing of monetary policy, which is boosting the cash flow of businesses and the household sector as a whole. It is also helping our trade-exposed industries through the exchange rate channel."

Bracing like the rest of society, Lowe said "we are expecting a major hit to economic activity and incomes in Australia that will last for a number of months. We are also expecting significant job losses.

"It is also important to repeat that we are expecting a recovery once the COVID virus is contained.

"The timing and strength of that recovery will depend in part upon how successful we are, as a nation, in building that bridge to the other side," he said.

"When that recovery does come, it will be supported by the low level of interest rates. We will maintain the current setting of interest rates until a strong recovery is in place and the achievement of our objectives is clearly in sight."

In the Q&A that followed Lowe was more colloquial and put a timing on the recovery, a brave call.

"We have to steel ourselves for a rise in unemployment rate," he said, leaving out the adjective massive.

Lowe said he was hopeful that "by the end of the year people that are losing their jobs in the next little while, will be getting their jobs back" either side of New Year.

The governor, who has dragged the RBA's employment mandate toward the forefront of policy making, made clear "it will be some time before we get to full employment and one reason we'll have this cash rate target for a long time."