RBA pumps out more cash

THE Reserve Bank will again fire up the money presses after warning the coronavirus outbreak in Victoria is having a major economic impact.

RBA governor Philip Lowe has announced the central bank will resume its bond-buying program, which is intended to stimulate the economy by pushing down borrowing costs.

In a statement after the RBA board’s monthly meeting on interest rates, Dr Lowe said the program would restart on Wednesday.

He again noted the Australian economy was going through its biggest contraction since the 1930s.

“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now under way in most of Australia,” he said on Tuesday.

“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.”

As widely expected, the central bank left the cash rate on hold at 0.25 per cent.

The RBA in recent months has been buying Australian government bonds in the secondary market, from banks and similar institutions.

In effect it uses cash that is freshly minted, albeit electronically, to purchase the assets with the expectation that banks will then lend out those funds, supporting economic growth.

Dr Lowe said the central bank was resuming the program as, in recent weeks, the yield on three-year government bonds had climbed “a little bit higher” than the central bank’s target of 0.25 per cent. Such a development points to upward pressure on borrowing costs.

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

The central bank’s “baseline scenario” was still for the economy to shrink 6 per cent in 2020 then grow 5 per cent the following year, he said.

That compares with a forecast in May for a similar decline this year followed by a more robust 6 per cent rebound next.

Dr Lowe yesterday said that in the updated scenario, unemployment was expected to hit about 10 per cent this year “due to further job losses in Victoria and more people elsewhere in Australia looking for jobs”.

That compares with 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,” Dr Lowe said.