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Australia's central bank boosts lending facility, considers other steps

Observers note shift in thinking of RBA to one of doing more amid fresh wave of infections, damaged confidence and rising joblessness


AUSTRALIA'S central bank expanded a lending facility for banks as it kept key policies unchanged on Tuesday, and signalled a renewed willingness to explore additional measures to boost an economy still mired in recession.

"The board will maintain highly accommodative settings as long as is required," Reserve Bank of Australia (RBA) chief Philip Lowe said, after keeping both the cash rate and three-year yield target unchanged at 0.25 per cent.

In an addition to the key final paragraph of guidance, the governor added that it "continues to consider how further monetary measures could support the recovery".

Under the increased Term Funding Facility (TFF), banks will have access to additional funding equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years. They will be able to draw on this up until the end of June 2021, it said.

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Lenders have so far drawn A$52 billion (S$52.13 billion), and today's change brings the total available to around A$200 billion, Mr Lowe said.

The RBA is coordinating with the government's wide-ranging stimulus programme by keeping rates near zero and purchasing bonds to keep borrowing costs down across the economy.

The central bank has bought about A$60 billion of government securities since it initiated the bond-buying in March; Mr Lowe said more will be undertaken as needed.

Gareth Aird, senior economist at Commonwealth Bank of Australia, said Mr Lowe's addition to the final paragraph was very important.

"This is the closest that we have been since the emergency mid-March board meeting to the governor, signalling that more monetary easing could in the offing in his post-meeting statements," he said. "We do not know what form additional easing may take, and we don't think that more easing is imminent. But it does suggest a slight shift in the governor's thinking."

Markets took little interest in the TFF's expansion or Mr Lowe's signal. The Australian dollar was little changed after the statement and traded at 74.04 US cents just before 4.30pm in Sydney.

Mr Lowe, in a July speech, compared a discussion at that month's policy meeting on alternative options to those undertaken by the central bank in March. These included:

  • The various interest rates currently at 25 basis points could have been set lower, at say 10 basis points;
  • It would also have been possible to introduce a programme of government bond purchases beyond that required to achieve the three-year yield target; and
  • Different parameters could have also been chosen for the TFF.

While the governor said the board had concluded there was no need to adjust its package, he added that it had not ruled out future changes to the package's configuration.

The governor, in Tuesday's policy statement, also highlighted the appreciation of the currency and that it was now near a two-year high. The Aussie dollar has surged almost 30 per cent from a March low, causing greater discomfort for the nation's exporters. Negative rates have been floated as an option to help take pressure off the currency.

Bill Evans, chief economist at Westpac Banking Corp, maintains the "risk/reward tradeoff" of such a move is attractive Down Under, given "the currency effect on a small open economy with large foreign debt".

While parts of Australia have reopened for business, Victoria's outbreak and renewed lockdown has damaged confidence and shut state borders. The RBA reckons that, as a result, unemployment is set to hit 10 per cent later this year and the national economy is unlikely to grow in the current quarter.

Data on Wednesday is expected to show gross domestic product plunged 6 per cent in the second quarter after dropping 0.3 per cent in the first, meeting the technical definition of a recession.

On the upside, China's stimulus is driving commodity prices higher, bringing a windfall to the Australian economy; consumer spending has remained buoyant, underpinned by the government's cash support and early access to retirement savings. BLOOMBERG

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