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Australia cuts rates to historic lows, expands bond-buying scheme

·3-min read
The Reserve Bank of Australia expects the economy to continue recovering but warned the outlook depended on containing the virus
The Reserve Bank of Australia expects the economy to continue recovering but warned the outlook depended on containing the virus

Australia's central bank slashed interest rates to historic lows and ramped up its huge bond-buying programme Tuesday in a push to help revive the country's pandemic-hit economy as it emerges from lockdowns.

However, bank governor Philip Lowe warned that the recovery would depend on keeping a lid on the coronavirus, which is seeing a resurgence in key markets in the US and Europe.

The Reserve Bank of Australia cut the cash rate from 0.25 percent to 0.10 percent and committed to buying Aus$100 billion (US$70.5 billion) of five- to 10-year government bonds over the next six months.

Lowe said the measures were designed to lower the cost of borrowing and push the Australian dollar lower to stimulate growth. The Aussie slipped to 70.40 US cents from 70.50 cents before the announcement.

It comes as the bank expects the economy to expand in the third quarter after Australia entered its first recession in nearly 30 years.

"Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus," Lowe said in a statement announcing the measures.

Australia had been recovering from the initial impact of virus lockdowns before its second-biggest city Melbourne was forced into another to contain a new outbreak. 

But the city reopened in late October after months of restrictions, sparking hopes a return to normality would hasten the country's economic recovery.

Unemployment hit 6.9 percent in September, with almost a million Australians out of work and many more taking pay cuts or seeing hours slashed since the pandemic began. 

The government and central bank had already embarked on a vast stimulus spending programme to avert a full-blown depression, putting the country on track to post a record budget deficit of Aus$213.7 billion this year. 

The bank now expects unemployment to peak at just below eight percent -- less than the 10 percent expected previously -- but hopes to drive the jobless rate lower.

Economic growth is expected to be around six percent over the year to June 2021 and four percent in 2022, it said.

Nevertheless, Lowe said it would "take some time to reach the pre-pandemic level of output" with the coming years expected to feature "subdued increases in wages and prices".

"Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time," he added.

The intervention in the bond market builds on an earlier bond-buying programme announced in March, and the bank's board said it was "prepared to do more if necessary".

Borrowing is likely to remain cheap for the foreseeable future, with the bank not expecting to increase the cash rate for at least three years.

The global economy has shown some signs of recovery since nosediving earlier in the crisis, but the turnaround has been jolted by a fresh spike in infections in the US and Europe that has forced fresh lockdowns in major economies including England and France.

Australia has coped relatively well with the pandemic, recording just over 27,500 cases and 907 deaths. 

hr/dan