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RBA prepares to restart bond purchasing

  • August 06 2020
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Invest

RBA prepares to restart bond purchasing

By Cameron Micallef
August 06 2020

The Reserve Bank of Australia will begin to repurchase bonds to keep the cost of borrowing down, according to an official statement.

RBA prepares to restart bond purchasing

RBA prepares to restart bond purchasing

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  • August 06 2020
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The Reserve Bank of Australia will begin to repurchase bonds to keep the cost of borrowing down, according to an official statement.

RBA prepares to restart bond purchasing

In a statement, governor of the Reserve Bank Philip Lowe announced that he was keeping the official cash rate at 0.25 per cent.

The yield on three-year Australian Government Securities (AGS) has been consistent with the target of around 25 basis points. The yield has, however, been a little higher than 25 basis points over recent weeks.

To combat this, the central bank will start purchasing bonds in the secondary market to ensure that three-year yields remain low.

Despite purchasing government bonds, Dr Lowe noted the economy is in a better position than the central bank’s dire forecast a few months earlier, but still points to an unflattering picture of the national economy.

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“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,” Dr Lowe said.

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

What the central bank outlined for the economy is not too dissimilar to the one presented in May, with the baseline scenario being the unemployment rate hitting 10 per cent later this year as further job losses from Victoria’s outbreak flow through.

“In the baseline scenario, output falls by 6 per cent over 2020 and then grows by 5 per cent over the following year,” according to governor Lowe’s statement.

In May, the RBA had forecast GDP would be 7 per cent by June 2021 and 6 per cent by December 2021.

“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.

“A stronger recovery is possible if progress is made in containing the virus in the near future. This progress would support an improvement in confidence and a less cautious approach by households and businesses to their spending.”

Dr Lowe added that “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”.

RBA prepares to restart bond purchasing
RBA prepares to restart bond purchasing
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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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