First round of QE sees Australia central bank buy $2.9 billion bonds

20.03.2020 - Davydova Maria
First round of QE sees Australia central bank buy $2.9 billion bonds

On Friday, the Central Bank of Australia purchased A$5 billion ($2.87 billion) worth of local government bonds. This came in its first round of unlimited quantitative easing program that aims at softening the blow of the coronavirus outbreak in the Australian economy.

The Reserve Bank of Australia’s (RBA) operation attempts at cuttting funding costs for banks. This they are doing to allow cheap credit across the economy, flirting with a recession that it hasn’t seen for the past 30 years.

This resolution led major Australian banks to disclose a sweeping package for the country’s smaller businesses through huge cuts of over 100 basis points to lending rates. In addition, the banks will be deferring repayments for virus-affected entities.

To date, nearly 800 cases of COVID-19 had bee reported from the continent. This had compelled the government to close borders and prohibit large public gatherings.

“I don’t think the government or the RBA want any of the (banks) to get into any sort of funding stress,” Jonathan Sheridan, chief investment strategist at FIIG stated in an interview.

“The RBA is fully aware of the liquidity issues and so with the Yield Curve Control they plan to buy an unlimited number of bonds,” Sheridan furthers.

“And the government has got to fund this with a fiscal response. They’ll have to do a lot more and they’ll have to issue more bonds so that the RBA can buy the short-dated ones to keep the yield at 0.25%.”

The second fiscal stimulus package is yet to be released by the government within the next days.

On Thursday, the RBA had slashed cash rate to 0.25% after an out-of-schedule meeting and had stated that it would be doing everything humanely possible so as to maintain yields on three-year government bonds low.

The target for the quantity or timing bonds that the RBA will be buying under the QE program have yet to be set. What the body made clear is that their purchase is dependent on market behavior.

The RBA had also proposed to purchase up to A$5 billion in bonds. These will mature in July 2022, April 2023, November 2027 and May 2028.

This resulted into Australia’s 10-year government bond yields AU10YT=RR slipping to 1.17% from near 1.3% following its Friday morning announcement with a high of 1.647% on Thursday. Yields on three-year bonds AU3YT=RR eased up to 0.3%. This is not far from what the RBA had set which is 0.25%.

“The majority of Australian mortgages are on variable rates. That’s effectively the main reason why the RBA has hugged the short-end of the curve because it anchors the bank’s funding cost,” Sheridan said.

The RBA’s stimulus had been released as global central banks were compelled to make decisions, albeit radical, to help keep the virus crisis at bay.

While this is the case, the steps taken had not been successful to stem a rout in financial markets; many remain fearful of an impending worldwide recession the eroding of world investments.

Across seas, the Central Bank of New Zealand offers a three-to-six month loans to banks with additional liquidity in the FX swap market in its aim at ensuring that lenders get ease of access to cheap credit.

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