RBA’s historic package to build a ‘bridge’ to recovery

The Reserve Bank of Australia is pulling out all stops to reduce the economic and financial carnage from the coronavirus pandemic. Running low on traditional monetary firepower, on Thursday the central bank pulled out its emergency “Big Bertha” howitzer. RBA governor Philip Lowe announced a rescue effort, including an all-time low cash rate of 0.25 per cent (down from 0.5 per cent); the start of quantitative easing via secondhand Treasury bond purchases (targeting an ultra-low 0.25 per cent yield for the key three-year bond); and a three-year funding facility worth at least $90bn (at a fixed rate of 0.25 per cent) for banks to lend to small and medium-sized businesses with cashflow problems. This is a massive package, a historic moment for the RBA, yet one it is well-placed to deliver. Dr Lowe said cheap money was here for “some years”, but not forever, as the misery of job losses and drop in output would be temporary.

Ever the optimist, Dr Lowe declared the virus would be contained and the Australian economy would recover. Of course, he’s right. But the days are long, turbulent, worrisome and loaded with new pronouncements. Dr Lowe declared the bank’s priority, echoing the entire official family of economic brains, “is to support jobs, incomes and businesses”, so that when the health crisis recedes, the country is well-placed to recover strongly. The metaphor used by the economic committee to save Australia, Canberra and Martin Place now in lockstep, is “building a bridge”, getting as many workers, families and businesses as possible to the safety of normalcy. This is new monetary territory for Australia, although there are parallels with the global financial crisis, when credit markets dried up, trading liquidity deteriorated and market volatility made it difficult for financial institutions.

Yet some players appear impervious to new policy. The huge swings on the sharemarket and the slump in prices are a reflection of many factors: repricing of risk, unwinding of exuberance, defensiveness, reduced profit expectations and a herd mentality. Some of this is linked to the real economy of goods, services, jobs and capital spending. Some of it is not. This is what markets do: watching them can be dull, thrilling, despairing, all in the same day. Over the long haul, dividends and prices are linked to fundamentals. Still, it’s cold comfort for investors of limited means, especially those who have saved for retirement. Low interest rates will nudge them to take on more risk, a fact weighing heavily on our monetary mandarins.

But, as Dr Lowe said many times before COVID-19 appeared, the nation’s economic fundamentals are sound. We are a rich country, with solid institutions, blessed with resources, land and people. The RBA chief urged us to remember that these endowments and structures will be there when the crisis passes. Another factor to grasp in the storm is that our financial system is strong, resilient and well-capitalised. Banks enjoy a privileged position, through guarantees and the like; so far, they appear to be stepping up to the task, with borrowing-rate reductions and repayment adjustments. The RBA funding facility measures are weighted to help small borrowers, the most vulnerable to a plummet in spending. Josh Frydenberg also announced a $15bn measure to support second-tier lenders and their customers.

A bigger, broader fiscal package is also imminent, with an expansion of income support to displaced workers. Some will argue the government’s first stimulus was inadequate. But Scott Morrison’s request to officials was to make the response temporary, targeted, proportionate and scalable. It’s clear now that the social displacement, economic disruption and medical crisis will last for at least six months. Rather than fiscal stimulus per se, the coming rollout of emergency economic measures is now presented by the Treasurer as “cushioning the blow”. As Australia closes borders to foreigners, increasingly restricts movement and gatherings, shutters its workplaces and puts even more pressure on its medical personnel and systems to flatten the curve of infections, the economy risks being suffocated. We are resilient, to a degree. With the RBA ventilating the banks, the Morrison government’s fiscal doctors are switching to survival mode, keeping the oxygen flowing to as many failing body parts as possible.