Crisis will pass: building a bridge to recovery

Australia has a strong financial system, which is well placed to provide the needed support to businesses and households

The Reserve Bank Board met on Wednesday and decided on a comprehensive package to help support jobs, incomes and businesses as the economy deals with the coronavirus.

We are clearly living in extraordinary and challenging times. The coronavirus is first and foremost a very major public health problem. But it has also become a major economic problem, which is having deep ramifications for financial systems around the world. The closure of borders and social distancing measures are affecting us all and they are changing the way we live.

Understandably, our communities and our financial markets are both having trouble dealing with a rapidly unfolding situation that they have not seen before. As our country manages this difficult situation, it is important we do not lose sight of the fact that we will come through this. At some point, the virus will be contained and our economy and our financial markets will recover.

Undeniably, what we are facing today is a very serious situation, but it is something that is temporary. As we deal with it as best we can, we also need to look to the other side when things will recover. When we do get to that other side, all those fundamentals that have made Australia such a successful and prosperous country will still be there. We need to remember that. To help us get to the other side, though, we need a bridge. Without that bridge, there will be more damage, some of which will be permanent, to the economy and to people’s lives.

Building that bridge requires a concerted team effort, with us all pulling together in the country’s interest. On the economic front, there is very close policy co-ordination between the federal government, the Treasury, the Reserve Bank and the financial regulators. We are all in close contact with one another and are working constructively together and we will continue to do so. This co-ordination is evident in the various policy statements today.

Governments across Australia are playing their important role in building that bridge to the recovery, with the various fiscal initiatives from the federal and state governments providing very welcome support. Rightly, the focus is on supporting businesses and households who will suffer a major hit to their incomes. It is increasingly clear that further help will be required on this front and the federal government has indicated that additional policy measures will be announced shortly. The public finances are in good shape and the country’s history of prudent fiscal management gives us the capacity to respond now.

The banks too have an important role to play in building that bridge to the recovery by supporting their customers. Without this support, it will be harder for us all to get to the other side in reasonable shape.

Australia has a strong financial system, which is well placed to provide the needed support to businesses and households. The system has strong capital and liquidity positions and our financial institutions have invested heavily in resilience. As APRA confirmed in a public statement, the current large buffers of capital and liquidity are able to be used to support ongoing lending to the economy.

The financial regulators have also confirmed that they are examining how the timing of various regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and work with their customers. APRA and ASIC both stand ready to assist institutions work through regulatory issues arising from the virus.

The Council of Financial Regulators is meeting again tomorrow and will also meet with the largest lenders to discuss how they can support their customers and whether there are any regulatory impediments in the way.

The Reserve Bank is also playing a role in building that bridge to the recovery. Our major focus is to support jobs, incomes and businesses, so that when the health crisis recedes the country is well placed to recover strongly. Supporting small business over coming months is a particular priority.

Prior to Thursday’s announcement, we had already taken several steps over recent days to support the economy. Over the past week or so we have been injecting substantial extra liquidity into the financial system through our daily market operations. As part of this effort, we will be conducting one-month and three-month repo operations each day. We will also conduct repo operations of six-month maturity or longer at least weekly, as long as market conditions warrant. As a result of these liquidity operations, exchange settlement balances have increased from around $2.5bn a month ago to over $20bn today.

The RBA also stands ready to purchase Australian government bonds in the secondary market to support its smooth functioning. The government bond market is a key market for the financial system, because government bonds provide the pricing benchmark for many financial assets. Our approach here is similar in concept to our longstanding approach to the foreign exchange market, where we have been prepared to support smooth market functioning when liquidity conditions are highly stressed. We now stand ready to do the same in the bond market and we are working in close co-operation on this with the Australian Office of Financial Management.

In addition to these previously announced measures, the package has four elements. They are: a reduction in the cash rate to 0.25 per cent; a target of 0.25 per cent for the yield on 3-year government bonds; a term funding facility to support credit to businesses, particularly small and medium-sized businesses; and an adjustment to the interest rate on accounts that financial institutions hold at the RBA.

Philip Lowe is the governor of the Reserve Bank of Australia. This is an extract of a speech delivered in Sydney on Thursday.