Central banks are ramping up their yardsticks to ease liquidity concerns
Link copied to
The Reserve Bank of Australia may not have much room to cut interest rates further, but it has other tricks up its sleeve, and is now implementing them.
It began on Friday, adding $8.8bn in liquidity to the banking sector through repurchase agreements or repo operations. The RBA added another $5.9bn today.
These are short-term moves in which financial institutions get cash reserves from the central bank in exchange for high-quality collateral.
This does not mean the bank is at risk of going bust. Instead it has its cash tied up in assets like bonds and either cannot quickly liquidate them or it is undesirable.
While this action itself is typical, Friday’s amount was more than double the usual daily amount as investors sold out.
While Friday’s movement appeared to be positively received by investors, it did not help the Australian market today with the ASX falling over 6 per cent.
Here's the exact moment the RBA conducted $8.8B in emergency repo operations to prevent credit markets freezing. Just a coincidence ASX finishes up 12% from the lows? This stimulus follows the announcement of MMT style helicopter money yesterday. 🇦🇺🧐🏦 #ausecon #ausbiz #auspol pic.twitter.com/AgHneMw7YJ
— Alex Saunders 🇦🇺👨🔬 (@AlexSaundersAU) March 13, 2020
In addition to the daily repos, the RBA said it would be conducting one and three-month operations until further notice.
It also pointed to the purchase of secondhand government bonds as a yardstick it could use eventually.
“Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus,” the RBA reassured in a statement today.
But it added that trading liquidity had deteriorated and it would work to ensure financial markets operated effectively and that credit was available to households and businesses.
Central banks around the world are stepping up their fiscal response to the pandemic. The US Federal Reserve has made two emergency interest rate cuts, the most recent being made overnight.
The Fed also announced late last week it would undertake repo agreements to the tune of $US1.5 trillion ($2.4 trillion).
This morning New Zealand’s Reserve Bank cut rates to 0.25 per cent. The bank said this rate would stay for 12 months.
It also decided to delay new capital rules requiring New Zealand’s banks to hold more capital on their balance sheets. The bank said this would lead to $NZ47bn ($46.1bn) more than otherwise would be lent out.
The central bank with the most eyes on it is China’s. The People’s Bank of China (PBOC) has cut its reserve requirement ratio — the cash banks need to keep on hand — by one percentage point.
The bank said this will lead to 550 billion yuan ($127.3bn) of liquidity. The cut took effect today with data set to be released imminently. It will show just how bad the virus hit China’s economy.
According to Bloomberg, it has not conducted open market operations in a month but economists expect these to restart soon.