Daily Bulletin


News

  • Written by Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
More than a rate cut: behind the Reserve Bank's three point plan

Today’s cut in the Reserve Bank’s cash rate to 0.25% brings it a new all-time low and the floor below which it plans to cut no more.

It means the rates set by the Reserve Bank of Australia, the United States Federal Reserve, the Bank of England and the Reserve Bank of New Zealand are all effectively 0.25%.

But it’s just the beginning.

Importantly, in his statement today Governor Philip Lowe said the Reserve Bank’s cash rate would stay at 0.25% for… well, for a very long time.

The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2% to 3% target band.

Governor Lowe has previously described the bank’s estimates for full employment as being centred around 4.5%, meaning that, if interpreted literally, he is saying the cash rate will stay at its new all-time rock-bottom low until unemployment turns back down instead of climbing from its present 5.1% (as the coronavirus restrictions mean it is certain to do).

1. Rates at rock bottom for the duration

And he is saying he won’t lift the cash rate from that all-time rock-bottom low until until he is confident that inflation confident that inflation will be back sustainably within the 2% to 3% target band, somewhere it hasn’t been or seven years and shows no sign whatsoever of reaching.

His commitment amounts to a commitment to keep rates at effective zero (the bank believes 0.25% is effective zero, the effective lower bound) for at least three years, maybe even the best part of a decade, or as he put it late today, an “extended period of time”.

For anyone thinking of borrowing at the ultra-low rates , it provides something close to a guarantee of no upward surprises for as far as the eye can see. For homeowners, that’ll mean a mortgage rate below 3% for as far as the eye can see, and for businesses, a bank loan with a base rate of 5%.

2. Cheap money for banks

To make sure banks can get money at that rate, the Reserve Bank is going to hand it to them.

It will provide a three-year funding facility to authorised deposit-taking institutions (banks and financial institutions that are similar to banks) at a highly-concessional fixed rate of 0.25%.

At first, it’ll provide 3% of their existing loan book.

Then it’ll give them extra “additional funding” on one condition: that they increase lending to business this year, especially to small and medium-sized businesses.

The payoff to banks for increasing lending to small and medium sized businesses is generous indeed.

For every extra dollar lent to large business, lenders will have access to an additional dollar of funding from the Reserve Bank. For every extra dollar of loans to small and medium-sized businesses, they will have access to an additional five dollars.

The funds can be drawn on until the end of March next year. There is no extra borrowing allowance for additional housing loans.

It’ll cost the Reserve Bank north of A$90 billion.

Separately, the government – through the treasury and its Australian Office of Financial Management (AOFM) – will advance $15 billion of its own money to enable smaller lenders to continue to lend to consumers and small businesses, bringing the total cost to more than $100 billion.

Read more: 'Yield curve control': the Reserve Bank's plan for when cash rate cuts no longer work

It’s a departure for the AOFM. Usually, it borrows on behalf of the government. Now it’ll be lending on behalf of the government, something it has done before, including during the global financial crisis, but that isn’t its core business.

3. Forcing money into investors hands

And, as long-expected, from tomorrow it’ll begin so-called quantative easing, buying government bonds from investors to force cash into their hands (and force down a range of long-term rates as a by-product).

It’ll buy “government bonds and semi-government securities across the yield curve” meaning it won’t be picky. If it can buy Commonwealth 10-year bonds, it’ll do it. If it can buy NSW Treasury Corporation 5-year bonds, it’ll do it. If it can buy local government bonds, it’ll do it.

If a particular part of the market isn’t working well, the bank might choose to focus on it, Dr Lowe said late on Thursday.

It will announce what it intends to buy each morning at 11.15 am.

The aim will be to get money into the hands of the investors that owned them (it will only buy from investors, not from the government) and to get money into the economy.

Regularly updated targets

To give it guidance, it will have a target. That target will be force the yield on a 3-year Commonwealth government down to 0.25% from its present 0.50%.

As Zac Gross explained in The Conversation on Tuesday, it won’t be about the 3-year rate as such, but about using rate that to give it (and us) a guide as to whether it is doing not enough, or too much.

It is likely to regularly publish its 3-year bond yield target (and later, perhaps its 10-year bond yield target) so we can see what it is doing, in much the same way as it has published its cash rate target up until now.

Its cash rate target is likely to remain 0.25% for years to come. From now on we will be focusing on other targets for other rates, and that’s what its monthly announcements will concentrate on.

Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

Read more https://theconversation.com/more-than-a-rate-cut-behind-the-reserve-banks-three-point-plan-134140

Writers Wanted

Ammonite: the remarkable real science of Mary Anning and her fossils

arrow_forward

Patch Tuesday Commentary from Chris Goettl, Senior Director of Product Management, Security at Ivanti:

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Prime Minister's Remarks to Joint Party Room

PRIME MINISTER: Well, it is great to be back in the party room, the joint party room. It’s great to have everybody back here. It’s great to officially welcome Garth who joins us. Welcome, Garth...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Business News

Getting Ready to Code? These Popular and Easy Programming Languages Can Get You Started

According to HOLP (History Encyclopedia of Programing Languages), there are more than 8,000 programming languages, some dating as far back as the 18th century. Although there might be as many pr...

News Co - avatar News Co

Avoid These Mistakes When Changing up Your Executive Career

Switching up industries is a valid move at any stage in your career, even if you’re an executive. Doing so at this stage can be a lot more intimidating, however, and it can be quite difficult know...

News Co - avatar News Co

4 Costly Mistake To Avoid When Subdividing Your Property

As a property developer or landowner, the first step in developing your land is subdividing it. You subdivide the property into several lots that you either rent, sell or award to shareholders. ...

News Co - avatar News Co



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion