MNI POLICY: RBA Cuts Rates, To Buy Bonds Targeting 3-Yr Yield

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia on Thursday cut its cash rate

to 0.25%, announced it will purchase Australian government bonds, laid out a

program to fund the banking system and  moved to introduced a higher rate of

interest on settlement balances at the central bank.

     It is the second rate cut in just over two weeks following a 25 basis point

cut on March 3.

     The RBA said it will buy government bonds and semi-government securities

along the yield curve. It didn't specify a monthly amount, instead saying it

would target at yield on the 3-year note of 0.25%. 

     "Purchases of Government bonds and semi-government securities across the

yield curve will be conducted to help achieve this target as well as address

market dislocations," Lowe said.

     --CHALLENGE

     In an announcement outside of the Bank's normal scheduling, RBA Governor

Philip Lowe said the package was needed to support the Australian economy

through the "challenging period" of the coronavirus epidemic.

     On cutting rates to the record low 0.25%, Lowe said there would be no

interest rate increase until "progress is being made towards full employment"

and the Bank's inflation target of between 2 % and 3%.

     The RBA also announced a term funding facility for the banking system

designed to support small medium sized businesses.

     The RBA will provide a three year A$90 bilion funding facility to

authorized deposit taking institutions (ADIs) at a fixed rate of 0.25%, and the

ADI's will be able to obtain initial funding of up to 3% of existing outstanding

credit.

     --DEPOSIT RATES

     The RBA also said it will remunerate exchange settlement balances at the

RBA at 10 basis points, rather than at zero as currently, helping shore up some

of the side effects that other central banks have noted.

     "This will mitigate the cost to the banking system associated with the

large increase in bank's settlement balances at the Reserve Bank that will occur

following these policy options," Lowe said.

     Earlier this week the RBA announced a program of repo operations, from one

month out to six months, to ensure liquidity in the banking system.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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