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The COVID-19 pandemic is primarily a public health issue, but it is also having a major impact on the economy and the financial system. In response to the pandemic, countries restricted the movement of people across borders and implemented social distancing measures. The result has been major disruptions to economic activity across the world. The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary policy, have played an important role in reducing the economic and financial disruption resulting from the virus. The Reserve Bank is committed to do what it can to support jobs, incomes and businesses in Australia. How the Reserve Bank Supported the EconomyIn response to the COVID-19 pandemic, the Reserve Bank put in place a comprehensive set of monetary policy measures to lower funding costs and support the supply of credit to the economy. Lower the Cash Rate Target to 0.1 Per centThe Reserve Bank Board reduced the cash rate twice in March 2020, to 0.25 per cent, and to 0.1 per cent on 3 November 2020. This boosted the cash flow of businesses and the household sector as a whole. It also helped Australia's trade-exposed industries through the exchange rate. Given the progress towards full employment and the evidence on prices and wages, the Board decided it was appropriate to start the process of normalising monetary conditions by raising the cash rate in May 2022. Government Bond Purchase ProgramThe Reserve Bank announced on 3 November 2020 that it would purchase bonds issued by the Australian Government and by the states and territories in the secondary market under a $100 billion bond purchase program. On 2 February 2021, the Bank announced that it would purchase an additional $100 billion of government bonds following completion of the initial bond purchase program in April 2021. On 6 July 2021, the Bank announced that it would continue purchases of government bonds following completion of the second $100 billion of bond purchases in early September 2021, at a rate of $4 billion per week until at least mid November. On 7 September 2021, the Bank announced that purchases would continue at this rate until at least mid February 2022. On 1 February, the Bank announced that bond purchases would cease after 10 February. The bonds purchased by the Bank helped lower the whole structure of interest rates in Australia. This supported the economy through the normal transmission mechanisms of monetary policy, including lower borrowing costs and a lower exchange rate than otherwise.
Provide a Term Funding Facility for the Banking System, to Support Lending to BusinessesThe objectives of the Reserve Bank's term funding facility (TFF) were to lower funding costs for the entire banking system to lower the cost of credit to households and businesses, and to provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses. The TFF was announced on 19 March 2020, and an increase and extension of the TFF was announced on 1 September 2020. On 3 November the interest rate on the TFF was reduced from 0.25 per cent to 0.1 per cent. On 30 June 2021 the TFF closed to new drawdowns as scheduled. As the facility has provided low-cost fixed-rate funding for 3 years it will continue to support low borrowing costs until mid 2024. Under the TFF, authorised deposit-taking institutions (ADIs) had access to new funding from the Reserve Bank for three years at an interest rate substantially below their funding costs. Access to new funding included an additional allowance associated with an ADI's growth of business credit. For every extra dollar of loans by ADIs to small and medium-sized businesses, ADIs had access to an additional five dollars of funding from the Reserve Bank. For every extra dollar lent to large businesses, ADIs had access to an additional dollar of funding. The Australian Government is supporting the markets for asset-backed securities through the Australian Office of Financial Management (AOFM). This support is important as it helps non-bank financial institutions and small lenders to continue to provide credit to Australian households and businesses.
Australian Government Bond Yield TargetOver recent decades, the Reserve Bank has targeted the overnight cash rate. In response to the pandemic, the Bank extended this by also targeting, for a period, a risk-free interest rate further out along the yield curve to help lower funding costs across the economy. The target was supported by Bank purchases of government bonds. On 19 March 2020, the Board announced a target for the yield on the 3-year Australian Government bond of around 0.25 per cent and reduced this target to around 0.1 per cent on 3 November 2020. On 6 July 2021, the Board announced that the yield target would continue to apply to the then-current 3-year Australian Government bond – the April 2024 bond – rather than roll to a later-maturity bond. On 2 November, the Board announced that the target on the April 2024 bond had been discontinued. How the Reserve Bank Supported the Functioning of Financial MarketsThe Reserve Bank announced measures to provide liquidity to financial markets in response to the disruptions in March 2020. Provide Liquidity to the Financial SystemThe Reserve Bank injected substantial extra liquidity into the financial system through its daily market operations. In March 2020, the Bank announced it would conduct regular one-month, three-month and six-month maturity repurchase operations as long as market conditions warranted. In April 2020, the Bank announced that daily open market operations were likely to be on a smaller scale in the near term given the substantial liquidity already in the system and the commencement of the Term Funding Facility. To assist with the smooth functioning of Australia's capital markets, the Bank decided in May 2020 to broaden the range of eligible collateral for the Bank's domestic market operations to include Australian dollar securities issued by non-bank corporations with an investment grade credit rating. Provide Liquidity to the Government Bond MarketThe Reserve Bank purchased Australian Government bonds and semi-government securities in the secondary market to support its smooth functioning, as required. The government bond market is a key market for the Australian financial system, because government bonds provide the pricing benchmark for many financial assets.
Established a Foreign Exchange Swap Line to Support US Dollar FundingThe Reserve Bank and the US Federal Reserve established a temporary swap line for the provision of US dollar liquidity. The swap line allowed the Reserve Bank to access up to US$60 billion in exchange for Australian dollars. The US dollars were made available to financial institutions operating in Australia via repos with the Reserve Bank. The swap line expired on 31 December 2021.
How the Reserve Bank is Supporting the Supply of BanknotesThe Reserve Bank is closely monitoring changes to banknote demand and is in regular contact with the banknote distribution network, including banks and cash transportation companies, to ensure the Reserve Bank is able to meet the needs of the Australian public. The Reserve Bank holds ample supply of banknotes. The Bank has contingency reserves to meet extreme events such as a pandemic, and stands ready to supply banknotes as required. The Bank holds several years of stock to be able to meet any increase in demand, and can print more at the Bank’s printworks in Melbourne if required. The Reserve Bank has been working with its distribution network to supply banknotes to some locations where temporary shortages are more likely to emerge due to short-term increases in demand. Cooperation with the Australian Government and Other AgenciesThe Reserve Bank is working closely with the Australian Government, the Australian Treasury and Australia's financial regulators on the coordinated response to COVID-19. Early in the pandemic, the financial regulators adjusted the timing of various regulatory initiatives to allow financial institutions to concentrate on their businesses and work with their customers. |
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