Coronavirus: Reserve Bank acts in ‘extraordinary times’

Banks will be flushed with $105bn in cheap cash as RBA pledges to do ‘whatever necessary’ to shield businesses, households.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

Australia’s banking system will be flushed with $105bn in cheap cash, the biggest stimulus in the nation’s history, as Reserve Bank governor Philip Lowe pledged to do “whatever is necessary” to shield businesses and households from the COVID-19 economic shock.

After the RBA slashed interest rates to a record low 0.25 per cent on Thursday, the first out-of-cycle cut since 1997, Josh Frydenberg said: “Extraordinary times call for extraordinary measures.’’

Dr Lowe announced a sweeping package to lower funding costs across the economy and support the provision of credit to small and medium-sized businesses, including the provision of at least $90bn to lenders via a three-year facility at a fixed rate of 0.25 per cent.

Ahead of the imminent release of the government’s multibillion-dollar business rescue package, which comes on top of last week’s $17.6bn stimulus package, the Treasurer said the government would provide an extra $15bn to enable smaller lenders to continue supporting consumers and small businesses.

The Treasurer said the ­combined $105bn lending measures reflected “our collective determination to do what it takes to support Australian jobs”, as the world deals with the “significant challenges presented by the spread of coronavirus”.

Following the release of the ­RBA’s historic stimulus package to help stave off a recession, Dr Lowe said Australians were “clearly ­living in extraordinary and ­challenging times” warranting a “significant intervention in the ­financial system”.

Investors failed to find comfort in the RBA’s landmark suite of measures, with heavy selling in bank stocks immediately after the announcement.

As the Australian dollar plunged to its lowest level since 2002, Dr Lowe said measures taken to confront the unprecedented challenges of the corona­virus pandemic were aimed at maximising an economic recovery when the crisis ended.

“To help us get to the other side … we need a bridge,” Dr Lowe said. “Without that bridge, there will be more damage, some of which will be permanent, to the economy and to people’s lives.”

As well as the lending ­facility, the RBA will give banks an extra dollar of cheap funding for every dollar they lend to businesses, and an extra $5 for every $1 they lend to small and medium-sized enterprises. From Friday, the RBA will begin an open-ended government bond-buying program aimed at keeping the three-year bond rate at 0.25 per cent, confirming the start of a large quantitative easing program for the first time in Australian history.

Commonwealth Bank was the only major bank to move following the rate cut, slashing fixed home loan rates by 0.7 percentage points but leaving variable rates unchanged. CBA also announced a one-­percentage-point reduction for all existing cash-linked small business loans.

Scott Morrison, who has been holding rolling meetings of cabinet’s expenditure review com­mittee with Mr Frydenberg this week, is close to finalising a ­second-round economic rescue package expected to take the total government spend above $40bn. The government, which on Thursday imposed a blanket ban on foreign nationals travelling to Australia, is considering what ­income support to offer thousands of people who could lose their jobs and have never accessed welfare.

A new welfare payment or changing the rules under existing arrangements to allow them to ­access taxpayer-funded financial support are options. Government ministers have been told at roundtables there are issues with employees accessing income support if they remain on the staff of businesses facing collapse.

The Australian on Thursday revealed the government was in negotiations with the big banks on a rescue plan for small and ­medium-sized firms that could see taxpayers underwriting loans to avoid businesses going under.

The Prime Minister, who has announced a $2.4bn health package and a $715m aviation rescue plan in addition to last week’s stimulus measures, is working on extra financial support for at-risk industries, including tourism and aviation. Mirroring Dr Lowe’s messaging, Mr Morrison said his plan to help the economy navigate the next six months was to “build a bridge to ensure Australians” get to the other side.

“They (the RBA measures) are highly aligned, completely synchronised with the actions that we’re taking as a government,” Mr Morrison said. “Their actions of over $90bn to support credit within the financial sector in Australia, topped off by the additional $15bn from the commonwealth, means this is a very significant injection to support Australians, to support our economy, to support business, to support jobs, as we all go across this bridge to the other side.”

Mr Frydenberg said the lending measures would support the “backbone” of the economy. “What the Reserve Bank has endeavoured to do here is not only to increase the flow of credit but to incentivise the banks to even provide more money to the small and medium-sized businesses across the country: the hairdressers, the mechanics and all the other small businesses that form the backbone of the Australian economy.”

The first unscheduled RBA move since July 1997 — only the fifth in the history of modern ­monetary policy in Australia — came amid increasing desperation among policymakers to ease ­financial conditions amid worldwide panic in investment markets that has wiped more than 30 per cent off the ASX in a month.

On Thursday, the Australian dollar plunged to nearly US55c, its lowest level in 18 years.

Dr Lowe, who met with the RBA board on Wednesday to finalise its package and is in regular contact with Mr Morrison and Mr Frydenberg, said their policy measures complemented “the welcome fiscal response from governments in Australia”.