RBA governor Philip Lowe announces restart of bond purchases

At its August meeting, the Reserve Bank board held rates steady and committed to driving the three-year yield back towards its 0.25 per cent target.

Reserve Bank governor Philip Lowe. Picture: Getty Images

The Reserve Bank of Australia will begin buying bonds again from Wednesday in order to push the three-year yield back down towards its 0.25 per cent target, RBA governor Philip Lowe has said, as the RBA released new forecasts and warned that Victoria’s coronavirus outbreak was “having a major effect on the Victorian economy”.

In a statement following Tuesday’s board meeting, Dr Lowe also announced, as expected, that the cash rate was unchanged at 0.25 per cent.

Dr Lowe said the yield on three-year Australian Commonwealth debt “has been consistent with the target of around 25 basis points”, but that over recent weeks it has been “a little bit higher” than the bank’s target.

“Given this, tomorrow the bank will purchase (bonds) in the secondary market to ensure that the yield on three-year bonds remains consistent with the target.

“Further purchases will be undertaken as necessary. The yield target will remain in place until progress is being made towards the goals for full employment and inflation.”

Dr Lowe said the bank’s updated economic forecasts, to be revealed on Friday, would show a less dire picture than painted in its May Statement on Monetary Policy.

“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia.”

But he warned that the “recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy”.

And the RBA’s baseline scenario as revealed by the governor is not dissimilar to that presented three months ago.

Dr Lowe said national GDP will fall by 6 per cent over 2020 and then grow by 5 per cent over the following year, versus the May forecasts for a similar decline this year followed by a more robust 6 per cent rebound in the next.

“In this scenario, the unemployment rate rises to around 10 per cent later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs,” Dr Lowe said.

This compares to the May prediction for a 9 per cent jobless rate in the December quarter.

“Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 per cent,” he said.

Dr Lowe said “the board is committed to do what it can to support jobs, incomes and businesses in Australia”, and that its “accommodative approach will be maintained as long as it is required”.

On March 20 Dr Lowe provided an out-of-cycle rate cup of 0.25 percentage points to its current level, and announced the central bank would begin an open-ended commitment to buying bonds in the open market to keep three-year yields at 0.25 per cent. Among other actions, the RBA also provided a cheap $105bn term funding facility for the banks to encourage them to lend to businesses.