Australia central bank embarks on QE, cuts rates to record lows

By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank cut interest rates for a second time this month on Thursday after an out-of-schedule policy meeting and made a foray into quantitative easing for the first time to help blunt the economic fallout from the coronavirus pandemic.

The Reserve Bank of Australia (RBA) reduced its cash rate to an all-time low of 0.25% and said the board would not tighten policy until it achieves its employment and inflation goals.

It also set a target for the yield on three-year Australian government bonds of around 0.25%, which it plans to achieve by purchases in the secondary market beginning Friday.

The announcement follows an unprecedented and large step up in global co-ordination by central banks, governments and regulators since the start of this week to cushion the economic impact of the coronavirus.

The U.S. Federal Reserve on Sunday slashed key rates by 100 basis points, boosted asset purchases and has flushed the system with liquidity. A number of other major central banks have since followed suit.

“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,” the RBA said in a post-meeting statement.

The RBA will also provide a three-year funding facility to the country’s banks at a fixed rate of 0.25%. Banks will be able to obtain initial funding of up to 3% of their existing outstanding credit.

“They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion,” the RBA added.

Earlier, the RBA used its daily market operation to pump a record A$12.7 billion into the banking system, aiming to ease liquidity constraints in a stressed bond market.

The RBA reiterated it would continue to provide liquidity into the financial markets.

The measures barely helped as the Australian dollar collapsed to $0.5510, the lowest since late 2002 while the hefty sell off in the bond market continued. The Aussie was last down 3.2% at $0.5584 while yields on three-year government bonds were last at 0.485%, nearly double the RBA’s target.

Prime Minister Scott Morrison’s government has also flagged further economic measures on top of the A$17 billion of fiscal stimulus already announced.

(Reporting by Swati Pandey; Editing by Sam Holmes)