RBA prepares for quantitative easing after US Fed cuts rates to near zero

As the impact of the coronavirus outbreak comes into sharp focus, central bankers around the world are taking emergency action.

In a statement released today, RBA Governor Philip Lowe indicated the central bank’s willingness to resort to quantitative easing to shield the economy from further deterioration.

"Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus. At the same time, trading liquidity has deteriorated in some markets,” Dr Lowe said.

“In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system."

RELATED: How low will interest rates go? (And what comes next?)

This comes after the US Federal Reserve made the extraordinary decision to cut its benchmark interest rate by 100 basis points, bringing it down to near zero. 

At a press conference, Fed Chairman Jerome Powell said the committee “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Along with the rate cut, the Fed also announced it will be reviving the quantitative easing program it deployed during the GFC by purchasing $500 billion in Treasury bonds and $200 billion in mortgage-backed securities.

It will also coordinate with five other central banks - the Bank of England, the Bank of Canada, the Bank of Japan, the Swiss National Bank, and the European Central Bank - to keep rates on currency swaps low.

New Zealand quick to follow

The other surprise news this week came from across the Tasman. Soon after the US Federal Reserve’s announcement, the Reserve Bank of New Zealand moved to reduce the country’s official cash rate by 75 basis points, bringing it down to 0.25%. 

The Committee indicated that interest rates will remain at 0.25% for at least 12 months, and that it will resort to “a Large Scale Asset Purchase programme of New Zealand government bonds” should further stimulus be required.

In a statement, New Zealand’s central bankers acknowledged the severity of the virus outbreak, plainly stating that its impact on the economy “is, and will continue to be, significant.”

“Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.”

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