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Policy Notes.docx - Notes for Policy Assignment Task:...

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Notes for Policy AssignmentTask:policy challenges and options identified by the Australian central bank (the RBA)in the light of COVID-19.Philip Lowe (Governor) speech to HoR Standing Committee on EconomicsBaseline scenario: 6% contraction CY2020, 5% growth CY2021, 4% growth CY2022Second wave and any further waves will offset recoverySome firms were able to stay afloat longer due to pipeline of contracts. Now that wehave been in for 6 months +, pipeline is being emptied and scaling back is occurring.To reverse this, we need stronger growth in aggregate demand.Households and businesses will likely remain more cautious and this will reduceconsumption and investment. Unlikely to see a quick return to previous patterns.Published unemployment rate will likely reach 10% and improve to 7% over the nextfew years, this iscritically important to address.Inflation will likely remain very lowInflation went -ve in the June quarter, first time in 50 yearsCaused mainly by low oil prices and free childcare trial1 – 1.5% inflation over the next few years1.5% wage growth expected over the next few yearsEconomic policy response belowoRBA response was to cut cash rate on 3rdMarchoJust two weeks later, another cut leaving interest rate at 25 basis pointsoIntroduction of target on 3 year gov bonds of 25 basis pointsoA term funding facility for the banking system where funds can be providedfor three years at 25 basis pointsTerm funding facility provides banks with an additional $5 of low-costfunding for every extra dollar of credit extended to themoContinued use of OMO’s to ensure financial system has high liquidityoModification of interest rate corridor system, with rate paid on exchangesettlement balances set at 10 basis points, rather than 0Purpose of this package is to keep funding costs low across economy and supportprovision of credit, particularly to small and medium sized businesses.Many other central banks have announced similar packagesRBA yield target is to be prepared to buy bonds in secondary market in whateverquantity was needed to achieve said target. $55 bn in purchases has been made tillJuly, mostly bought March and AprilPurchases worked, lowering yields and eased market dislocationPurchased some more bonds recently to try and keep 3 year bonds at 25 basis pointsYield target of 25 basis points was chosen for a number of reasons:oMore direct way of achieving objective of low funding costs
oBond purchasing plans would lower yields indirectly, and would have comewith challenges in calibrating purchase sizesoDirectly targeting longer term risk-free interest rates is an extension oftargeting the cash rate, which is the risk-free interest rate at the start oftheyield curve.

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Term
One
Professor
Temesgen Kifle

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