Central banks began unconventional policies in 2001 when the Bank of Japan began buying government bonds. After the GFC, the US Federal Reserve, the European Central Bank and the Bank of England joined in after slashing their official rates down to zero or below. Now the RBA will join the club, buying government bonds in order to hold medium-term bond yields down.
As part of its overall response to the coronavirus and its “very major impact on the economy and the financial system”, the RBA announced a cut to its cash rate target from 0.50% to 0.25% in its first intermeeting rate cut since the mid-1990s. It also announced a suite of three additional policies.
A target of 0.25% has been set for the three-year Australian government bond yield, starting from Friday 20 March. The RBA considers the 3-year rate to be important “as it influences funding rates across much of the Australian economy and is an important rate in financial markets.” RBA chief Philip Lowe said the bank would be “prepared to transact in whatever quantities are necessary to achieve this objective.”
A term-funding facility worth at least $90 billion will be made available to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25%. ADIs will be able to borrow from the facility amounts equivalent to a maximum of 3% of their existing loans. Additional funding will be made available if lending to business is increased, “especially to small and medium-sized businesses”. The RBA expects to maintain the 0.25% target “until progress is being made towards our goals of full employment and the inflation target.”