MNI INSIGHT: RBA Dovish As Australia Sinks Into Recession

The Reserve Bank of Australia's expansion of its Term Lending Facility for commercial banks indicates a continuing dovish outlook, and maybe even a willingness to reassess its estimate of the effective lower bound if necessary and cut the cash rate cut from its historic low of 0.25%, MNI understands.

While RBA Governor Philip Lowe has signaled it is unlikely to go as far as taking the cash rate into negative territory or to embark on quantitative easing, its decision to increase the TFF from the AUD90 billion announced in March to as much as AUD$200 billion was its first policy move in six months.

Its outlook remains dovish, which could mean it looks again at the cash rate. Any eventual reduction would be accompanied by a lower yield control target, MNI understands.

FIRST RECESSION IN THREE DECADES

The RBA has also purchased AUD$60 billion in Australian government bonds under its yield control strategy.

The TFF is a discount line of credit to lenders at 0.25% meant to encourage lending to companies into next year. It should also reduce banks' dependence on bond markets and enable them to issue more cheaply when they do tap investors.

The initial TFF period was meant to expire at the end of September, along with government job support, but both have now been extended into next year.

The RBA has repeated that Australia's downturn has not been as bad as feared, but GDP figures yesterday showed the economy contracted by 7% in the second quarter, the biggest fall on record, marking the country's first recession in three decades.