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***December 2020 update: RBA has kept cash rate at 0.1%
As expected, the Reserve Bank (RBA) reduced a range of interest rates following its monthly board meeting. The cash rate was reduced from 0.25% to 0.10%.
In March, the RBA began setting a target for the 3-year government bond yield by buying and selling bonds across the curve (called yield-curve control). The target was set at ‘around’ 0.25% and was reduced to 0.10% today.
In a new move, the RBA will introduce a separate bond-buying program (i.e. quantitative easing) for maturities beyond three years. It now plans to purchase bonds in the 5 to 10-year range, thus impacting on yields further along the yield curve.
The RBA now has a price target (for the 3-year bond yield) and a quantity target (for its bond buying program for maturities of 5-10 years).
In its effort to support businesses and job creation, the RBA in March also introduced a Term Funding Facility (TFF) whereby lenders could borrow from this fund to on-lend to clients. The borrowing rate from this fund was initially set at 0.25% and today was also reduced to 0.10%.
The Banks are still taking their time to decide on whether to pass on the rate cut. CBA is the first major bank to make the move to reduce their interest rates on both Home Loan and Business Loan products.
The policy package is designed to work via three channels. Lower lending rates should lift cash flows and so lift spending. There will be downward pressure on the Australian dollar because of lower bond yields. Lower yields and access to credit will put upward pressure on asset prices. This will strengthen personal and business balance sheets allowing more scope for spending.
More information from Philip Lowe's speech: https://www.rba.gov.au/speeches/2020/sp-gov-2020-11-03.html
Source: Hans Kunnen & Besa Deda, Bank of Melbourne's Economists
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