2020.04.0707:46:00UTC+00Australia Holds Rate, Asset Purchases On Severe Economic Contraction Outlook

Australia's central bank maintained its interest rate and the target yield on three-year government bonds as it expects the economy to register a "very large" contraction in the second quarter due to the disruption caused by the coronavirus, or Covid-19, pandemic.

At the monetary policy meeting on Tuesday, the Reserve Bank of Australia board kept its interest rate at a record low 0.25 percent and the targeted yield on three-year government bonds at around 0.25 percent.

The bank reduced the interest rate twice in March, by 25 basis points each.

The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 percent target band, RBA Governor Philip Lowe said in a statement.

The bank had announced an asset purchase programme and a three-year funding facility to help small and medium sized firms, at the emergency meeting held on March 19.

Policymakers on Tuesday reaffirmed all elements of the package announced in the extra policy meeting in March.

Since the target was introduced, the RBA bought around A$36 billion of government bonds in secondary markets, Lowe said.

"If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required," he added.

The central bank chief pointed out the considerable uncertainty about the near-term outlook for the economy, and said much will depend on the success of the efforts to contain the coronavirus.

Nonetheless, a very large economic contraction is expected to be recorded in the June quarter and the unemployment rate is forecast to increase to its highest level for many years, he said.

Lowe said the board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus.

Given the easing in tensions on financial markets, Marcel Thieliant, an economist at Capital Economics, said the RBA will not adjust policy settings over the coming months. Looking further ahead though, the case for negative interest rates will grow as the bank would not be able to meet its full employment and inflation targets for years to come, the economist added.