February 16, 2023 • 23 mins
June 2021 | What monetary policy measures have we implemented since the outbreak of COVID-19? Why were they implemented? How have they supported the Australian economy? Head of Communications Judy Hitchen discusses these questions with members of our senior leadership team.
Guests
Deputy Governor Guy Debelle
Assistant Governor (Economic) Luci Ellis
Assistant Governor (Financial Markets) Christopher Kent
Head of Domestic Markets Marion Kohler
Additional resources
Monetary Policy During COVID | Speeches - May 2021
Uncertainty and Risk Aversion – Before and After the Pandemic | Speeches - June 2021
The Term Funding Facility, Other Policy Measures, and Financial Conditions | Speeches - June 2021
From Recovery to Expansion | Speeches - June 2021
Lessons and Lasting Effects of the Pandemic | Speeches - June 2021
Transcript
Monetary Policy during COVID-19 - Transcript
First published: 3 June 2021
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:13):
Welcome to a podcast from the Reserve Bank of Australia.
Today we are discussing the Reserve Bank's monetary policy measures implemented since the outbreak of Covid 19.
This podcast is an opportunity to hear from the Reserve Bank's leadership team about what,
how and why we took each step along the way.
The story begins in early 2020 as the world began to reckon with the rapid and widespread outbreak of the coronavirus joining us now is Lucy Ellis,
(00:38):
assistant governor for the economic group and she takes us back to March 2020.
So Lucy,
can you begin by describing the environment at that time?
Well,
March was really the period where we realized that this was a big global shock in january and february.
The main issue for the domestic economy had been the bushfires.
(00:59):
We knew that the lockdowns in china were going to be a hit on their output,
particularly in the weeks after chinese New year.
But we didn't know how much at that point And it really was until we got to the beginning of March where you saw this pandemic spread to other countries,
where you saw lockdowns in a range of other countries that you could see it being a very big shock for the global economy.
(01:23):
We knew that China was going to be heavily affected.
We could see electricity output and various other indicators that were suggesting a big contraction and by the time we got to early March,
it was clear it was going to be about 10%,
which is roughly what it was during March.
The pandemic spread quickly on the 11th of March,
the World Health Organization formally declared covid 19 a global pandemic at that stage,
(01:48):
there were more than 118,000 cases in 114 countries and over 4000 people had lost their lives.
The Australian prime Minister announced Australia was closing its borders from the evening of the 20th of March.
At that stage,
Australia had close to 1000 confirmed cases in terms of the effect on the Australian economy,
as we knew it at that time,
(02:09):
we did know that the closure of the border with china was going to affect a number of industries.
The education industry was going to be affected.
Many chinese students were not able to get to Australia and had to study online,
which means they weren't spending money here.
Some of them were able to get through via third countries and doing their quarantine there,
(02:29):
but others were not able to and that was a big hit to our university sector.
Similarly,
tourism,
there are parts of the tourism industry that are more focused on international tourism rather than domestic tourism and so they were being affected as well.
So we could see that there were these areas that were being affected.
But as at early March,
(02:49):
it wasn't so clear cut that it was going to hit Australia in the same way that it hit china on the 18th of March,
the Reserve Bank Board held an out of cycle emergency meeting and the following day on the 19th of March,
Governor Philip Lowe announced some major initiatives to support the economy.
These included a further reduction in the cash rate to a quarter of a percent from half a percent,
(03:11):
a target for the yield on three year Australian government bonds of around a quarter of a percent.
The establishment of a term funding facility to provide funds to authorize deposit institutions which are essentially the banks for three years at a fixed interest rate of a quarter of a percent forward guidance that the board will not increase the cash rate until progress is being made towards full employment.
(03:32):
And is confident that inflation will be sustainably within the 2-3% target band and the purchase of bonds to address market dysfunction in the Australian government bond market out of cycle board meetings are very rare for the reserve bank.
Deputy Governor Guy Debelle explains the what and why of this extraordinary meeting.
So,
guy,
can you tell us why the bank took these steps at that time?
(03:54):
The situation both here in Australia and globally,
was rapidly evolving back in March,
we were looking at a significant hit to the Australian economy and to the global economy.
So the board took the decision to provide this support to the economy alongside the substantial support that the government government was providing through fiscal policy.
(04:16):
We were concerned that there would be a very large decline in output as the health restrictions are being imposed,
and also through the impact of um the border closures both here and elsewhere around the world,
already seen sharp declines in activity in china and in parts of europe,
in response to the imposition of those restrictions.
(04:39):
So we're looking at very large decline in output and employment in the Australian economy.
Many of these programs announced by the RBA we're new to this market,
unconventional monetary policy occurs when tools other than changing a policy interest rate are used.
Having said that these tools are being increasingly used around the world,
Marianne Kohler,
(05:00):
who heads domestic markets at the Reserve Bank of Australia and has responsibility for implementing many of these tools tells us a bit about them,
Marian could we start with conventional monetary policy.
Most central banks in advanced economies target in the current frameworks,
they have their target short term interest rates in Australia.
(05:21):
That is the overnight cash rate.
And we've been targeting that for many years when the cash rate moves,
many other interest rates move with it.
This then in turn influences foreign saving and investment decisions in the economy and stimulates the overall economy when that cash rate is at the lower bound because the board decides that it doesn't want to lower them further because of costs associated with negative interest rates.
(05:51):
That is when you then use unconventional policy tools when you set quantity for how much you want to buy,
you call this QE.
And we have done that in our quantitative quantity and we have done that in our bond purchase problem.
If you set a target for the yield for the price of the asset,
(06:14):
that's not quite quantitative easing.
And we have done that in our yield target program where we said we want to hold the yield of the three year bond government bond at a certain rate and then we just buy as much as we need to buy to achieve that achieve.
There's another type of tool that a lot of central banks have used and that's known as forward guidance.
(06:37):
Um and forward guidance as an unconventional tool.
Central banks obviously use forward guidance all the time.
They talk about what they're expecting.
But as a tool means really you give an explicit guidance to the markets,
to the households,
to the businesses or what you think your future policy rates will be often a number of years into the future.
(07:00):
And we have,
for example,
had the forward guidance over the past year that we think the cash rate will not be raised for the next coming for years.
Finally,
there's another type of tools that a lot of central banks have been used and we have used the term funding facility that provides low cost funding to banks and by providing lower,
(07:26):
low cost funding to the banks.
You lower their funding costs and that should lead them to be able to reduce the interest rates they charge on Boris and that is another interest rate going through and that ultimately will support the supply of credit as well.
So on unconventional tools and I have described three big types.
(07:47):
There's other ones as well.
They've always been in the toolkit of central banks,
actually not new,
and central banks have used them on occasion in history,
but quite often,
particularly to address financial market conditions.
The function of financial markets where you needed.
What is unconventional about that is to use these tools actually to ease financial conditions more broadly and stimulate the economy.
(08:13):
Some people have suggested unconventional monetary policy is the same as printing money.
Is that concept correct?
The central bank does not actually print banknotes to pay for the asset purchases.
So we buy government bonds,
but we actually don't pay with them with bank notes.
So what we have in a modern system is an electronic way of paying for this.
(08:35):
We pay for them by creating what's known as central bank reserves.
And in Australia we call an exchange settlement balances.
And these are really the balances.
The banks have in the accounts they hold with the central bank.
And when a bank customer of a bank makes a transaction with another customer of the bank,
those balances get moved into the other accounts and move around.
(09:00):
And so when we purchase a bond either from a bank directly or from a customer of the bank.
what we do is we credit the account of that bank.
The term funding facility was established by the bank in the early stages of the pandemic and launched at the out of cycle board meeting in March to encourage banks to lend to consumers and business particularly small business.
(09:22):
During the pandemic chris Kent.
Assistant governor,
financial markets who has responsibility for domestic and international departments,
discusses how the term funding facility works The bank,
the reserve bank saying to other banks,
the commercial banks will be providing you a certain amount of funding at a term of up to three years at current low rate of 10 basis.
(09:52):
And so that gives the banks an option to come to us so they can come to us on any day and say we'd like to take you up on that opportunity.
And what they do is the mechanics of it would be the bank coming to us and saying I'd like 100 million,
let's make it up.
You know,
(10:12):
if it's a large bank,
a number of a share of their allocated total allocation.
I'd like to take that out in two days.
So in two days time we provide them that 100 million of cash into their exchange settlement account which is the bank account at the reserve bank.
And then in return we make sure they give us some high collateral of one form or another.
(10:34):
So that could be a government bond state government bond or it might be another type of security and we take that as security chris why did we feel the need to introduce the tFF This was a way of giving banks surety that they could fund credit,
that they wouldn't their funding would be limited because at the height of the pandemic funding markets for banks and other large corporations were considerably strained and the price of going out to say issue a private bank bond of three years had gone up and it wasn't even clear that that funding would be available in the same terms as before.
(11:16):
So to help augment what we were doing with the lower cash rate.
For example,
the forward guidance,
we decided well at the same price will provide banks funding for three years so long as they provide a good quality collateral and that gives them not only surety about access to funding,
(11:36):
but at a low price.
So then with conviction,
know they can go out and make loans through a good amount of time at a low price and that's indeed what they've done.
We added an extra bit in there which was an incentive for them to provide funding to business,
particularly to small business From March to November,
(11:57):
shattered the global and local economies Lucy provides a short overview of what happened during this period,
Well,
the activity restrictions required many businesses to shut entirely and hundreds of thousands of people lost their jobs in the first phase of those restrictions,
job keeper helped.
Once it was introduced,
many workers were able to stay on the books and they were able to retain their connection to their employer.
(12:21):
But unemployment did go up a lot.
It went from just over five prior to the pandemic to peaked around 7.5% in july.
And so there were an awful lot of people lost their jobs over those months,
especially in hospitality and the other industries such as travel,
that were most affected by restrictions.
But you also saw jobs lost right across the economy.
(12:43):
In a range of different industries,
many businesses were uncertain about their the demand that they might be facing.
There was a lot of uncertainty.
Some people would have been delaying plans to spend because they were concerned about the health situation and the economic situation and they would have delayed hiring or laid off staff because of that.
(13:06):
But as the year progressed,
it became clear that the health situation was a lot better than we had feared than everyone had feared really,
and a lot better than you saw in many other countries.
I mean,
the Melbourne lockdown did delay the recovery in victoria,
but outside of victoria's saw a very rapid snap back to spending patterns that were close to where we had been pre pandemic,
(13:32):
There were some differences.
Large events weren't happening.
There was more spending on goods,
particularly household goods than there were on services.
There was still a lot of uncertainty,
but it really was quite a rapid recovery once restrictions eased and we realized over the course of those months that the main constraint on activity was in fact the activity restrictions that were needed for health reasons.
(13:54):
So how did Australia compared to other global economies?
Well,
we were among the pan full of countries that had a relatively rapid control over covid 19 and over the pandemic.
We were able to close our borders.
We were able to prevent further cases coming in by having hotel quarantine,
even though it didn't always prevent cases getting out.
(14:19):
It certainly massively reduced the flow of new virus coming in and that meant that it was possible for test trace and quarantine to work.
It was possible to get the caseload down to very low or even zero for extended periods.
And that meant it was feasible to release a lot of these activity restrictions,
lockdown,
(14:39):
stay at home orders and slowly some of the industries that were most affected by that.
We're able to come back at its meeting on the third of november 2020 the Reserve Bank board announced further measures to support the recovery of the Australian economy.
This package included a reduction in the cash rate to 1/10 of 1%.
A reduction in the target yield on the three year Australian government bond to around 1/10 of 1%.
(15:04):
A reduction in the interest rate on new drawings under the term funding facility to 1/10-1% following the announcement in September 20 to increase and extend the term funding facility to 30 June 2021.
The board also included a new measure which was the purchase of $100 billion of government bonds of maturity of around five and 10 years.
(15:25):
Over the subsequent six months.
We have Deputy Governor Guy Debelle here again to provide insights into why we took these steps.
So in november,
we've obviously learned more about the pandemic and its economic impact and as time had passed,
become increasingly apparent,
there was going to be long lasting effects including high unemployment from uh as a result of the pandemic and so the outlook remains was still very much uncertain but and we actually upgraded the near term outlook for the economy at this point.
(15:57):
But nevertheless,
we're still looking forward,
expected to be very long lasting impacts.
Another consideration was that monetary policy easing at that point in november was likely to get more more traction than it might have when there were widespread restrictions in place earlier in the so in earlier months,
the some of the usual transmission mechanisms of monetary policy weren't working as normally and the challenges facing the country were better addressed by other policy tools.
(16:25):
But now in by november as restrictions are being eased and people had more opportunities that span our assessment was that further easing may actually provide additional support to the other policies already in place include including both the government's fiscal policy and the earlier steps of the R.
B.
A.
Itself had taken.
(16:46):
In terms of the bond purchase program.
One of the things we were taking account of what the longer term yields in Australia were higher than those in other countries.
And part of our assessment for that was that the impact of other central bank bond purchase programs were having on build bond yields in their country,
in their economies.
(17:06):
And so our assessment was that if we were to undertake such a program,
it would push down bond yields further bond yields further,
which would lead to further lowering of interest rates,
both for the government,
but also for uh for all other borrowers in Australia.
B the households buying a home or businesses wanting to borrow to expand into the,
(17:28):
into the recovery chris Kent explains to us how the bank has conducted the bond buying program.
So we announced a total amount we're buying over six months Roughly.
That and that equates to about five billion a week.
That's exactly what we've done most of the time.
(17:49):
And so we have auctions where we buy two billion of the Australian government securities on monday we buy one billion of the state government securities,
the so called semis on a Wednesday.
And then on a thursday we buy another two billion of the government Australian government securities,
the A.
(18:09):
G.
S.
At its first meeting in 2021?
On the second of february,
the reserve bank board announced the bank would purchase an additional $100 billion worth of bonds when the current bond purchase program was completed in mid april those purchases are underway.
Now,
Guy double runs us through the announcement by the board in february 2021.
(18:30):
So in February,
the board decided to purchase an additional $100 billion $100 billion November and maintain the other policy settings that were in place at that point.
(18:50):
Um The assessment was that we need to remain committed to providing highly supportive monetary conditions And given that the the outlook for an inflation being sustainably within the target range and unemployment being sufficiently low unemployment being sufficiently strong was still some way off that the board needed to uh continue to just set monetary policy settings to support the economy to achieve those goals.
(19:20):
To lower finance costs for borrowers can deliver a lower exchange rate than otherwise,
support the supply of credit needed for the recovery and support household and business balance sheets.
So the decision to extend that bond purchase program was ensuring a continuation of that monetary support.
Finally,
guy talks to us about the outlook for some of the monetary policy measures introduced by the bank since its first major announcement in March 2020 guy,
(19:47):
some of the programs such as the Tff will expire shortly.
Will the stimulus remain passed this time?
What happens to monetary policy?
Once some of these measures are gradually unwound.
The board has decided not to extend the closes at the end of june,
but all of the money borrowed under the TFF,
which is borrowed for three years,
(20:08):
is going to continue to provide stimulus while ever it's out there being borrowed.
And it's continuing to lower borrowing rates for borrowers,
both business and households.
And similarly,
the bonds purchase under the bond purchase program continued to provide stimulus until they're mature,
which is quite some time away.
So,
uh while the TFF funds are out there and while the bonds have been purchased before they mature,
(20:35):
they're all continuing to provide stimulus as long as there are there,
there's been a lot of attention on the impact of monetary policy measures on rising house prices.
Can you discuss this impact?
So house price rises are part of the transmission of expansionary monetary policy to the economy,
lower interest rates contributing to rising house prices.
(20:57):
But rising house prices help encourage home building and along with the government grants such as home building,
a home builder policy,
they're boosting activity and employment.
So we recognize we recognize that rising house prices,
heightened concerns in part of the community and they do have can have distributional consequences and that's certainly an issue that needs to be considered?
(21:19):
And there are a number of tools that can be used to address the issue.
But I don't think that monetary policy is one of those tools,
monetary policy is focused on supporting the economic recovery and achieving its goals in terms of employment and inflation.
It's important to remember that if we didn't have that supportive monetary policy which was leading to those rising helps prices,
Then unemployment would be unambiguously higher and potentially materially higher than without the military stimulus.
(21:46):
And unemployment clearly has large and persistent distributional consequences.
Could you take a step back and describe how monetary policy has supported the economic recovery so far?
So,
all of the policy measures that the bank has taken since March 2020 have worked collectively to deliver lower borrowing costs for households,
businesses and governments,
(22:07):
and they're supporting the flow of credit and boosting cash flows for household and business borrowers,
borrowers.
So while it's difficult to determine the individual contribution that each particular policy action is making,
because they're all working collectively in the same direction and they're also providing that support alongside the substantial support to the economy provided by the commonwealth and state governments,
(22:30):
but they have delivered lower borrowing costs for households,
businesses and governments and they are supporting the flow of credit.
That's very that's very clear and the outcome has been that the economy has turned out to be much better than expected and the economy has actually exceeded all of the upside scenarios that we envisaged over the past year.
(22:51):
Although while that's been true in terms of both economic growth and also in terms of employment and unemployment,
it's not so much been the case in terms of wages and inflation,
which by and large have coming about as we had expected.
They would Thank you to our leadership team for sharing their views and explaining the implementation of monetary policy.
(23:11):
Since the outbreak of COVID-19 together,
monetary and fiscal policies are contributing to a recovery in demand and pick up unemployment.
Welcome to a podcast from the Reserve Bank of Australia.
Today we are discussing the Reserve Bank's monetary policy measures implemented since the outbreak of Covid 19.
This podcast is an opportunity to hear from the Reserve Bank's leadership team about what,
how and why we took each step along the way.
The story begins in early 2020 as the world began to reckon with the rapid and widespread outbreak of the coronavirus joining us now is Lucy Ellis,
(00:38):
assistant governor for the economic group and she takes us back to March 2020.
So Lucy,
can you begin by describing the environment at that time?
Well,
March was really the period where we realized that this was a big global shock in january and february.
The main issue for the domestic economy had been the bushfires.
(00:59):
We knew that the lockdowns in china were going to be a hit on their output,
particularly in the weeks after chinese New year.
But we didn't know how much at that point And it really was until we got to the beginning of March where you saw this pandemic spread to other countries,
where you saw lockdowns in a range of other countries that you could see it being a very big shock for the global economy.
(01:23):
We knew that China was going to be heavily affected.
We could see electricity output and various other indicators that were suggesting a big contraction and by the time we got to early March,
it was clear it was going to be about 10%,
which is roughly what it was during March.
The pandemic spread quickly on the 11th of March,
the World Health Organization formally declared covid 19 a global pandemic at that stage,
(01:48):
there were more than 118,000 cases in 114 countries and over 4000 people had lost their lives.
The Australian prime Minister announced Australia was closing its borders from the evening of the 20th of March.
At that stage,
Australia had close to 1000 confirmed cases in terms of the effect on the Australian economy,
as we knew it at that time,
(02:09):
we did know that the closure of the border with china was going to affect a number of industries.
The education industry was going to be affected.
Many chinese students were not able to get to Australia and had to study online,
which means they weren't spending money here.
Some of them were able to get through via third countries and doing their quarantine there,
(02:29):
but others were not able to and that was a big hit to our university sector.
Similarly,
tourism,
there are parts of the tourism industry that are more focused on international tourism rather than domestic tourism and so they were being affected as well.
So we could see that there were these areas that were being affected.
But as at early March,
(02:49):
it wasn't so clear cut that it was going to hit Australia in the same way that it hit china on the 18th of March,
the Reserve Bank Board held an out of cycle emergency meeting and the following day on the 19th of March,
Governor Philip Lowe announced some major initiatives to support the economy.
These included a further reduction in the cash rate to a quarter of a percent from half a percent,
(03:11):
a target for the yield on three year Australian government bonds of around a quarter of a percent.
The establishment of a term funding facility to provide funds to authorize deposit institutions which are essentially the banks for three years at a fixed interest rate of a quarter of a percent forward guidance that the board will not increase the cash rate until progress is being made towards full employment.
(03:32):
And is confident that inflation will be sustainably within the 2-3% target band and the purchase of bonds to address market dysfunction in the Australian government bond market out of cycle board meetings are very rare for the reserve bank.
Deputy Governor Guy Debelle explains the what and why of this extraordinary meeting.
So,
guy,
can you tell us why the bank took these steps at that time?
(03:54):
The situation both here in Australia and globally,
was rapidly evolving back in March,
we were looking at a significant hit to the Australian economy and to the global economy.
So the board took the decision to provide this support to the economy alongside the substantial support that the government government was providing through fiscal policy.
(04:16):
We were concerned that there would be a very large decline in output as the health restrictions are being imposed,
and also through the impact of um the border closures both here and elsewhere around the world,
already seen sharp declines in activity in china and in parts of europe,
in response to the imposition of those restrictions.
(04:39):
So we're looking at very large decline in output and employment in the Australian economy.
Many of these programs announced by the RBA we're new to this market,
unconventional monetary policy occurs when tools other than changing a policy interest rate are used.
Having said that these tools are being increasingly used around the world,
Marianne Kohler,
(05:00):
who heads domestic markets at the Reserve Bank of Australia and has responsibility for implementing many of these tools tells us a bit about them,
Marian could we start with conventional monetary policy.
Most central banks in advanced economies target in the current frameworks,
they have their target short term interest rates in Australia.
(05:21):
That is the overnight cash rate.
And we've been targeting that for many years when the cash rate moves,
many other interest rates move with it.
This then in turn influences foreign saving and investment decisions in the economy and stimulates the overall economy when that cash rate is at the lower bound because the board decides that it doesn't want to lower them further because of costs associated with negative interest rates.
(05:51):
That is when you then use unconventional policy tools when you set quantity for how much you want to buy,
you call this QE.
And we have done that in our quantitative quantity and we have done that in our bond purchase problem.
If you set a target for the yield for the price of the asset,
(06:14):
that's not quite quantitative easing.
And we have done that in our yield target program where we said we want to hold the yield of the three year bond government bond at a certain rate and then we just buy as much as we need to buy to achieve that achieve.
There's another type of tool that a lot of central banks have used and that's known as forward guidance.
(06:37):
Um and forward guidance as an unconventional tool.
Central banks obviously use forward guidance all the time.
They talk about what they're expecting.
But as a tool means really you give an explicit guidance to the markets,
to the households,
to the businesses or what you think your future policy rates will be often a number of years into the future.
(07:00):
And we have,
for example,
had the forward guidance over the past year that we think the cash rate will not be raised for the next coming for years.
Finally,
there's another type of tools that a lot of central banks have been used and we have used the term funding facility that provides low cost funding to banks and by providing lower,
(07:26):
low cost funding to the banks.
You lower their funding costs and that should lead them to be able to reduce the interest rates they charge on Boris and that is another interest rate going through and that ultimately will support the supply of credit as well.
So on unconventional tools and I have described three big types.
(07:47):
There's other ones as well.
They've always been in the toolkit of central banks,
actually not new,
and central banks have used them on occasion in history,
but quite often,
particularly to address financial market conditions.
The function of financial markets where you needed.
What is unconventional about that is to use these tools actually to ease financial conditions more broadly and stimulate the economy.
(08:13):
Some people have suggested unconventional monetary policy is the same as printing money.
Is that concept correct?
The central bank does not actually print banknotes to pay for the asset purchases.
So we buy government bonds,
but we actually don't pay with them with bank notes.
So what we have in a modern system is an electronic way of paying for this.
(08:35):
We pay for them by creating what's known as central bank reserves.
And in Australia we call an exchange settlement balances.
And these are really the balances.
The banks have in the accounts they hold with the central bank.
And when a bank customer of a bank makes a transaction with another customer of the bank,
those balances get moved into the other accounts and move around.
(09:00):
And so when we purchase a bond either from a bank directly or from a customer of the bank.
what we do is we credit the account of that bank.
The term funding facility was established by the bank in the early stages of the pandemic and launched at the out of cycle board meeting in March to encourage banks to lend to consumers and business particularly small business.
(09:22):
During the pandemic chris Kent.
Assistant governor,
financial markets who has responsibility for domestic and international departments,
discusses how the term funding facility works The bank,
the reserve bank saying to other banks,
the commercial banks will be providing you a certain amount of funding at a term of up to three years at current low rate of 10 basis.
(09:52):
And so that gives the banks an option to come to us so they can come to us on any day and say we'd like to take you up on that opportunity.
And what they do is the mechanics of it would be the bank coming to us and saying I'd like 100 million,
let's make it up.
You know,
(10:12):
if it's a large bank,
a number of a share of their allocated total allocation.
I'd like to take that out in two days.
So in two days time we provide them that 100 million of cash into their exchange settlement account which is the bank account at the reserve bank.
And then in return we make sure they give us some high collateral of one form or another.
(10:34):
So that could be a government bond state government bond or it might be another type of security and we take that as security chris why did we feel the need to introduce the tFF This was a way of giving banks surety that they could fund credit,
that they wouldn't their funding would be limited because at the height of the pandemic funding markets for banks and other large corporations were considerably strained and the price of going out to say issue a private bank bond of three years had gone up and it wasn't even clear that that funding would be available in the same terms as before.
(11:16):
So to help augment what we were doing with the lower cash rate.
For example,
the forward guidance,
we decided well at the same price will provide banks funding for three years so long as they provide a good quality collateral and that gives them not only surety about access to funding,
(11:36):
but at a low price.
So then with conviction,
know they can go out and make loans through a good amount of time at a low price and that's indeed what they've done.
We added an extra bit in there which was an incentive for them to provide funding to business,
particularly to small business From March to November,
(11:57):
shattered the global and local economies Lucy provides a short overview of what happened during this period,
Well,
the activity restrictions required many businesses to shut entirely and hundreds of thousands of people lost their jobs in the first phase of those restrictions,
job keeper helped.
Once it was introduced,
many workers were able to stay on the books and they were able to retain their connection to their employer.
(12:21):
But unemployment did go up a lot.
It went from just over five prior to the pandemic to peaked around 7.5% in july.
And so there were an awful lot of people lost their jobs over those months,
especially in hospitality and the other industries such as travel,
that were most affected by restrictions.
But you also saw jobs lost right across the economy.
(12:43):
In a range of different industries,
many businesses were uncertain about their the demand that they might be facing.
There was a lot of uncertainty.
Some people would have been delaying plans to spend because they were concerned about the health situation and the economic situation and they would have delayed hiring or laid off staff because of that.
(13:06):
But as the year progressed,
it became clear that the health situation was a lot better than we had feared than everyone had feared really,
and a lot better than you saw in many other countries.
I mean,
the Melbourne lockdown did delay the recovery in victoria,
but outside of victoria's saw a very rapid snap back to spending patterns that were close to where we had been pre pandemic,
(13:32):
There were some differences.
Large events weren't happening.
There was more spending on goods,
particularly household goods than there were on services.
There was still a lot of uncertainty,
but it really was quite a rapid recovery once restrictions eased and we realized over the course of those months that the main constraint on activity was in fact the activity restrictions that were needed for health reasons.
(13:54):
So how did Australia compared to other global economies?
Well,
we were among the pan full of countries that had a relatively rapid control over covid 19 and over the pandemic.
We were able to close our borders.
We were able to prevent further cases coming in by having hotel quarantine,
even though it didn't always prevent cases getting out.
(14:19):
It certainly massively reduced the flow of new virus coming in and that meant that it was possible for test trace and quarantine to work.
It was possible to get the caseload down to very low or even zero for extended periods.
And that meant it was feasible to release a lot of these activity restrictions,
lockdown,
(14:39):
stay at home orders and slowly some of the industries that were most affected by that.
We're able to come back at its meeting on the third of november 2020 the Reserve Bank board announced further measures to support the recovery of the Australian economy.
This package included a reduction in the cash rate to 1/10 of 1%.
A reduction in the target yield on the three year Australian government bond to around 1/10 of 1%.
(15:04):
A reduction in the interest rate on new drawings under the term funding facility to 1/10-1% following the announcement in September 20 to increase and extend the term funding facility to 30 June 2021.
The board also included a new measure which was the purchase of $100 billion of government bonds of maturity of around five and 10 years.
(15:25):
Over the subsequent six months.
We have Deputy Governor Guy Debelle here again to provide insights into why we took these steps.
So in november,
we've obviously learned more about the pandemic and its economic impact and as time had passed,
become increasingly apparent,
there was going to be long lasting effects including high unemployment from uh as a result of the pandemic and so the outlook remains was still very much uncertain but and we actually upgraded the near term outlook for the economy at this point.
(15:57):
But nevertheless,
we're still looking forward,
expected to be very long lasting impacts.
Another consideration was that monetary policy easing at that point in november was likely to get more more traction than it might have when there were widespread restrictions in place earlier in the so in earlier months,
the some of the usual transmission mechanisms of monetary policy weren't working as normally and the challenges facing the country were better addressed by other policy tools.
(16:25):
But now in by november as restrictions are being eased and people had more opportunities that span our assessment was that further easing may actually provide additional support to the other policies already in place include including both the government's fiscal policy and the earlier steps of the R.
B.
A.
Itself had taken.
(16:46):
In terms of the bond purchase program.
One of the things we were taking account of what the longer term yields in Australia were higher than those in other countries.
And part of our assessment for that was that the impact of other central bank bond purchase programs were having on build bond yields in their country,
in their economies.
(17:06):
And so our assessment was that if we were to undertake such a program,
it would push down bond yields further bond yields further,
which would lead to further lowering of interest rates,
both for the government,
but also for uh for all other borrowers in Australia.
B the households buying a home or businesses wanting to borrow to expand into the,
(17:28):
into the recovery chris Kent explains to us how the bank has conducted the bond buying program.
So we announced a total amount we're buying over six months Roughly.
That and that equates to about five billion a week.
That's exactly what we've done most of the time.
(17:49):
And so we have auctions where we buy two billion of the Australian government securities on monday we buy one billion of the state government securities,
the so called semis on a Wednesday.
And then on a thursday we buy another two billion of the government Australian government securities,
the A.
(18:09):
G.
S.
At its first meeting in 2021?
On the second of february,
the reserve bank board announced the bank would purchase an additional $100 billion worth of bonds when the current bond purchase program was completed in mid april those purchases are underway.
Now,
Guy double runs us through the announcement by the board in february 2021.
(18:30):
So in February,
the board decided to purchase an additional $100 billion $100 billion November and maintain the other policy settings that were in place at that point.
(18:50):
Um The assessment was that we need to remain committed to providing highly supportive monetary conditions And given that the the outlook for an inflation being sustainably within the target range and unemployment being sufficiently low unemployment being sufficiently strong was still some way off that the board needed to uh continue to just set monetary policy settings to support the economy to achieve those goals.
(19:20):
To lower finance costs for borrowers can deliver a lower exchange rate than otherwise,
support the supply of credit needed for the recovery and support household and business balance sheets.
So the decision to extend that bond purchase program was ensuring a continuation of that monetary support.
Finally,
guy talks to us about the outlook for some of the monetary policy measures introduced by the bank since its first major announcement in March 2020 guy,
(19:47):
some of the programs such as the Tff will expire shortly.
Will the stimulus remain passed this time?
What happens to monetary policy?
Once some of these measures are gradually unwound.
The board has decided not to extend the closes at the end of june,
but all of the money borrowed under the TFF,
which is borrowed for three years,
(20:08):
is going to continue to provide stimulus while ever it's out there being borrowed.
And it's continuing to lower borrowing rates for borrowers,
both business and households.
And similarly,
the bonds purchase under the bond purchase program continued to provide stimulus until they're mature,
which is quite some time away.
So,
uh while the TFF funds are out there and while the bonds have been purchased before they mature,
(20:35):
they're all continuing to provide stimulus as long as there are there,
there's been a lot of attention on the impact of monetary policy measures on rising house prices.
Can you discuss this impact?
So house price rises are part of the transmission of expansionary monetary policy to the economy,
lower interest rates contributing to rising house prices.
(20:57):
But rising house prices help encourage home building and along with the government grants such as home building,
a home builder policy,
they're boosting activity and employment.
So we recognize we recognize that rising house prices,
heightened concerns in part of the community and they do have can have distributional consequences and that's certainly an issue that needs to be considered?
(21:19):
And there are a number of tools that can be used to address the issue.
But I don't think that monetary policy is one of those tools,
monetary policy is focused on supporting the economic recovery and achieving its goals in terms of employment and inflation.
It's important to remember that if we didn't have that supportive monetary policy which was leading to those rising helps prices,
Then unemployment would be unambiguously higher and potentially materially higher than without the military stimulus.
(21:46):
And unemployment clearly has large and persistent distributional consequences.
Could you take a step back and describe how monetary policy has supported the economic recovery so far?
So,
all of the policy measures that the bank has taken since March 2020 have worked collectively to deliver lower borrowing costs for households,
businesses and governments,
(22:07):
and they're supporting the flow of credit and boosting cash flows for household and business borrowers,
borrowers.
So while it's difficult to determine the individual contribution that each particular policy action is making,
because they're all working collectively in the same direction and they're also providing that support alongside the substantial support to the economy provided by the commonwealth and state governments,
(22:30):
but they have delivered lower borrowing costs for households,
businesses and governments and they are supporting the flow of credit.
That's very that's very clear and the outcome has been that the economy has turned out to be much better than expected and the economy has actually exceeded all of the upside scenarios that we envisaged over the past year.
(22:51):
Although while that's been true in terms of both economic growth and also in terms of employment and unemployment,
it's not so much been the case in terms of wages and inflation,
which by and large have coming about as we had expected.
They would Thank you to our leadership team for sharing their views and explaining the implementation of monetary policy.
(23:11):
Since the outbreak of COVID-19 together,
monetary and fiscal policies are contributing to a recovery in demand and pick up unemployment.
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.