Australia’s central bank said it would “maintain highly accommodative settings as long as required” in order to support the nation’s recovery from the coronavirus-related economic downturn.
According to minutes of its September meeting disclosed Tuesday, the Reserve Bank of Australia determined it would maintain the bank’s record low cash rate of 0.25% and continue purchases of 3-year government bonds in order to maintain a yield of 0.25%. Some analysts had expected an additional cut to the cash rate, which the bank had cut in response to the coronavirus.
The central bank added that it would not raise rates until “until progress is made towards full employment and it is confident that inflation will be sustainably within the 2-3 percent target band.”
And though the central bank’s board did not announce any substantial changes to monetary policy, it pledged to “continue to consider how further monetary measures could support the recovery.”
Australia has seen a relatively low rate of coronavirus infections compared to nations like the United States and India, but the nation’s GDP is nonetheless expected to contract 4.5% this year, according to the International Monetary Fund. The central bank expects a more substantial contraction of 6%.
Moody’s said in a report earlier this month that strain on the country’s financial system will stretch far into 2021, with Australia’s big four banks -- ANZ, Commonwealth, NAB and Westpac -- expected to see a surge of nonperforming home loans once payment deferral programs expire in March.
The ratings agency said each of the big four banks faces a “bleak” near-term outlook, but the Reserve Bank of Australia was less moody.
“Banks' funding costs were at historic lows and banks had good access to funding,” the bank said in the minutes. “Banks had also continued to receive large inflows of deposits, another relatively low-cost source of funding.”
The Reserve Bank of Australia added that take-up of its term funding facility had picked up as the end-of-September deadline for initial allocations approached, though the bank added that some of the new liquidity through the facility and new deposits had been offset by banks not replacing wholesale bond funding as it matured.
Australian firms also face the threat of rising tension with China, its number-one trading partner.
Demand for business loans remained subdued this summer, which the central bank said reflected “the weakness in economic conditions and the high level of uncertainty.”
The bank extended the availability of its term funding facility to June 2021 and increased its total size to AUD 200 billion ($146 million). The bank said the move was intended to increase credit availability to businesses, particularly those that are small and medium-sized.
Despite historically low interest rates, mortgage demand also remained low.
“This largely reflected reduced demand from borrowers, given the weak and uncertain economic environment and its effect on the housing market,” the central bank explained. “Housing loan commitments had increased over June and July, but had remained below their recent peak.”
Consumer credit somewhat tightened over the summer, the central bank added.