RBA cuts, launches QE into carnage

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Macro Afternoon

From the RBA just now:

The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities. The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.

Financial market volatility has been very high. Equity prices have experienced large declines. Government bond yields have declined to historic lows. However, the functioning of major government bond markets has been impaired, which has disrupted other markets given their important role as a financial benchmark. Funding markets are open to only the highest quality borrowers.

The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus.

At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.

At a meeting yesterday, the Reserve Bank Board agreed to the following comprehensive package to support the Australian economy through this challenging period:

  1. A reduction in the cash rate target to 0.25 per cent.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 2–3 per cent target band.
  2. A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow. The Bank will work closely with the Australian Office of Financial Management (AOFM) and state government borrowing authorities to ensure the efficacy of its actions. Further details about the implementation of this are provided in the accompanying notice.
  3. A term funding facility for the banking system, with particular support for credit to small and medium-sized businesses.The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent. ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit. They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion. Further details are available in the accompanying notice.The Australian Government has also developed a complementary program of support for the non-bank financial sector, small lenders and the securitisation market, which will be implemented by the AOFM.
  4. Exchange settlement balances at the Reserve Bank will be remunerated at 10 basis points, rather than zero as would have been the case under the previous arrangements.This will mitigate the cost to the banking system associated with the large increase in banks’ settlement balances at the Reserve Bank that will occur following these policy actions.

The Reserve Bank will also continue to provide liquidity to Australian financial markets by conducting one-month and three-month repo operations in its daily market operations until further notice. In addition, the Bank will conduct longer-term repo operations of six-month maturity or longer at least weekly, as long as market conditions warrant.

The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium-sized businesses.

Australia’s financial system is resilient and well placed to deal with the effects of the coronavirus. The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy. The Reserve Bank is working closely with the other financial regulators and the Australian Government to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses.

Today’s policy package from the Reserve Bank complements the welcome fiscal response from governments in Australia. Together, these measures will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery.

There will be a press conference with further details at 4.00pm AEDT today.

And so far, the bond market has failed to price any of it at the short end and has jack-knifed rates at the long…

This is the most extreme monetary stress of my lifetime.

Houses and Holes
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  1. “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 2–3 per cent target band.”

    So. In a few weeks time then, when imported inflation takes its toll at wherever the A$ lands?

    • DingwallMEMBER

      and in a few weeks time then, when an imported virus takes it’s toll on unemployment …………..

    • Jumping jack flash

      They had to say that to ensure that everyone piled on the debt train without fear of the interest rates going up again, ever. Even when this coronavirus nonsense eventually disappears. Toot toot!

      Its JARC – Just Another Rate Cut, to add to the long list of failed rate cuts.

    • In a few months time inflation will be 10-20%. Almost everything is trade-able these days. Everything from gas to milk can be exported or sold internally.

      Your farmer will prefer to export his produce and get paid more in US dollars than sell it locally. Same with almost everything.

      The falling AUD will cause inflation and the RBA’s first duty is to control inflation.

      They will have to raise interest rates before July.

      • happy valleyMEMBER

        They will do that over Straya’s dead body – therefore, now a live possibility..

      • Jumping jack flash

        Errr… this already happens…
        Most of the food processing factories I have contact with in my job export their best and most expensive food overseas. Supermarket chains get the next pick.

    • keynesian Killa

      Dropped rates to 0.25% and no market reaction…….Its almost like they can’t control anything, lol
      RIP MMT. It was amusing whilst you lasted

        • keynesian Killa

          “The RBA can fix it in a second” David Llewellyn-Smith circa yesterday.
          Market says no buddy.

      • Whilst they announced the rate cut today, it was ‘communicated’ to the market on Monday. Almost everyone would have understood after Monday’s comments, that the rate cut and QE was going to happen today (Thursday), the only thing in doubt would have been the quantum. Then again, if you know the RBA, you would know they would never do anything unexpected, innovative or bold, so 25 basis point cut and an underwhelming QE program was all we could have hoped for.

  2. So those rigid dildos at the RBA had to wait till their usual 2.30pm to announce action. Amazed this time it wasnt first Tuesday in the month ….

    • happy valleyMEMBER

      Have got their priorities right – caviar and champagne lunch as per usual, after a very hard morning going over the $250m building refurb plans. Hopefully, materials for that are sourced locally or otherwise, let’s call the revised cost $300+++m.

    • DingwallMEMBER

      They had to make sure their positions were protected – their SMSF’s to take full advantage

  3. im not bright so correct me if im reading this wrong, they are directly supporting banks in the hope they lend more to medium-small businesses?

    • Jumping jack flash

      Yes, but most small to medium businesses probably can’t afford the debt at any price, even the low, low price of whatever margin the bank wants to add to 0.25% to get a bit more rich from this 3% bounty.

      • this is what im thinking unless they want them to take out a loan and pay employees with it, because they sure as heck can’t let employees go or the unemployment rockets and businesses close. maybe they want the businesses to take the loan to pay the bills and let all the staff go who will then be put onto the governments new and special newstart 2.0.

        • Jumping jack flash

          I was thinking a similar thing when they lowered the rates in August last year and cited jobs and wages growth as the reason… I thought they must have gone completely insane and expected businesses to take on debt to create positions and pay wages.

          A bit more desperation now, do you think?

          Phil: “Take the bait, businesses, taaake eet!”

          I can just see the desperation. They desperately want all this cheaper and cheaper debt sloshing around to be finally used to inflate wages and thereby trigger a new round of debt growth to repay the interest on the existing debt and pull the economy out. I doubt it will happen.

          It just doesn’t work like that

    • Looks like you are right and they have said they will support the banks. Deposits look safe

      • happy valleyMEMBER

        You’d hope that the RBA happy clappies would realise that deposits are fairly important in the scheme of things, but who knows with academics?

        • You would think so but why the need for bail in legislation?

          “With a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders, to restructure their capital so it can stay afloat. In effect, the bank is allowed to convert its debt into equity for the purpose of increasing its capital requirements.” Ann Lawler NSW State Secretary of the Citizens Electoral Council. December 10 2018
          “Despite the contradictions of APRA, Treasury and the Treasurer and Prime Minister, Australia has also passed bail-in legislation that provides for the conversion of customers’ deposits if a bank becomes insolvent.” Anthony Allison Monday, 8 April 2019

      • Deposits are not safe. They are being decimated right now in terms of purchasing power.

  4. I’m damn annoyed. I had a bet at 40s that they would cut by 50bp in March and they choked then only to do it now.

  5. BoomToBustMEMBER

    Can anyone explain to this untrained arm chair economist how lowering the rates will fix a Covid-19 shutdown ??

    • Lowering interest rates avoids community infections as ppl dont go out as much. That way we can easily bring the virus under control. This is a great fix, like a white-swan event.

    • It gives property buyers confidence to go out and buy, pushing prices up and so people can access the equity in their houses and in turn go out and spend, because there is no way in hell that the banks are going to lower their loan rates to business, those are going to stay at 14% like that have for the last 6 years of rate cuts

      • +1. Sheesh do we have to explain this. It’s simple. Why can’t people understand it.

    • Jumping jack flash

      Lowering the cash rate places the formula for the cure for the coronavirus into the aether where it can finally be accessed and transferred into the thought patterns of the eggheads all frantically trying to think up a cure.

      Once the cure is in the aether, it becomes “available”, so don’t be surprised if a few said eggheads suddenly “discover” a cure.

      Basically it is magical stuff that nobody understands, but certainly be assured that this wouldn’t have happened without lowering the cash rate.

    • Mining BoganMEMBER

      It heats the things up, and the WuFlu don’t be liking the heat.

      See Singapore.

  6. Debt levels of households and governments at unfathomable levels.

    Before the GREATEST DEPRESSION of 2020-23 we wondered how any of the debt would ever be paid back and that’s with near zero interest rates since the GFC in 2008.

    Growth was already anaemic. Wages flat.

    The fiat currency experiment is over. Lasted 50 years. This goes in the annals alongside other failed experiments like socialism and communism.

    Governments will go down kicking and screaming though and stimulate their economies into oblivion.

    Surely a combination of gold standard currencies and cryptocurrencies rise out of the ashes of fiat currency. There will be a total lack of faith in fiat currencies the world over.

    Going forward it will be impossible for any government with a fiat currency to implement any kind of austerity after all the helicopter money that will be dropped on people and businesses. People will just demand governments fire up the printing presses whenever it gets hard.

    Scene is set for China to annex Taiwan in the coming years and take the South China Sea.

    • innocent bystander

      Surely a combination of gold standard currencies and cryptocurrencies rise out of the ashes of fiat currency. There will be a total lack of faith in fiat currencies the world over.

      or maybe barter.

      • In terms of barterable exchanges fiat essentially is barter, merely abstracted for convenience.
        I trade 1 hour work for 1 toilet roll much more convenient via the intermediate currency rather than trying to work for tp manufacturer.
        All the fiat currency shenanigans are only effecting store of wealth uses of currency that barter is inconsequential for.

    • Jumping jack flash


      Debt doesn’t get repaid, just the interest. And more debt is created and used to pay the interest.

      Basically the entire system relies on growth. This is why everyone goes on about growth all the time. Growth this and growth that. Growth, growth, growth.

      The fact is that if the growth isn’t fast enough the whole thing collapses because the interest can’t get paid… so they lower interest rates lower and lower as the debt expands and the growth can’t keep up.. when the nonproductive debt expands so much that the interest rates reach zero and STILL the growth can’t keep up, then they resort to these zany schemes that are coming into play now to lower interest rates even further to try and boost the growth to create the debt to repay the interest.

      The problem would be solved if interest rates could be zero, but this would also mean that the banks would have no reason to exist.

      Total collapse is inevitable, of course. It is a matter of how long they can pretend everything is under control.

    • SnappedUpSavvyMEMBER

      1 on chyna making a move, their economy right now must be completely dead, like ours in a couple months, so they wont recover until the rest of the world does, chyna is really in big trouble

  7. DingwallMEMBER

    LOL AUD traders………… we like the RBA action ………… we don’t ……………..wait we do…………. oh no we don’t ………… sh!t yes we do …………… ooops maybe not…… seems OK ….. what’s tha mean

    Reminds me of the scene out of RED 2 where John Malkovich’s character continually slaps then hugs then threatens then hugs the guy he has drugged for information

  8. Look at the bright side of all the carnage. I bet the carbon emission in 2020 will be materially lower than 2019 or the 2010s average or the 2000s average or even the 1990s average.

    Headlines will read “Coronavirus saved the planet” around this time next year. Who could have known?