The Reserve Bank will offer commercial lenders up to $200 billion in cheap cash to help bolster the recovery from recession with the depth of Australia’s worst economic downturn since the end of World War II to be revealed on Wednesday. Holding official interest rates at 0.25 per cent, the RBA board on Tuesday surprised markets by extending its term funding facility that enables banks to access low-interest funds that can then flow to small and medium-sized businesses.
Banks have already drawn down $52 billion under the facility, which was established in March, with RBA governor Philip Lowe saying the total amount now available will be closer to $200 billion. The extra cash will be available between October 1 and June 30 next year. “The increase and extension to the facility is in response to the ongoing protracted economic weakness and high uncertainty arising from the COVID-19 pandemic,” he said. Apart from increased lending to businesses, the scheme should help banks keep a lid on interest rates to mortgage customers and replace expensive money borrowed from overseas. It also gives banks the opportunity to buy risk-free government bonds and make a small profit that would also help the states and Canberra reduce their own interest costs. The move came ahead of the release of the June quarter national accounts, which will confirm the nation’s first recession since 1990-91. The nation’s economists are tipping a contraction in the quarter of between 5 per cent, forecast by NAB, and 7.2 per cent, which JPMorgan is expecting. That would follow the 0.3 per cent fall in GDP through the first three months of the year.
Annual growth is also expected to turn negative, to contract between 4.3 per cent and 6.5 per cent. Australia’s worst annual result occurred in 1930, during the depths of the Great Depression, when the economy shrank by an estimated 10 per cent. The impact of the coronavirus recession was evident in the nation’s trade figures, which showed a current account surplus through the quarter of $17.7 billion, the largest on record. Exports fell 6.7 per cent, led down by an 8.3 per cent drop in coal sales and a 3.2 per cent slip in LNG sales. Iron ore exports defied the drop to grow by 5.4 per cent. But imports fell by even more, down 12.9 per cent including a 50.5 per cent collapse in service imports such as tourism. Service imports have fallen to their lowest level since 2003. Separate figures showed state and federal government spending soared 42.3 per cent in the June quarter to a record $255 billion as programs such as JobKeeper and the coronavirus welfare supplement hit taxpayers’ bank accounts. Dr Lowe, who said the RBA expects unemployment to reach 10 per cent later this year and remain elevated for an extended period of time, warned the recovery out of recession would be both “uneven and bumpy” with Victoria taking a substantial hit. He signalled more government support on top of low interest rates would be needed to help the economy. “Fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment,” he said. Treasurer Josh Frydenberg, who will hand down the budget on October 6, said the government had already pumped almost $85 billion into the economy directly through programs like JobKeeper. He urged the states do more, saying they had promised about 2.4 per cent of GDP worth of support measures while the federal government was offering 15.8 per cent. But shadow treasurer Jim Chalmers said while the government had promised more than $300 billion it was already planning on winding back its support. “This recession will be deeper and unemployment queues will be longer because the Morrison government is leaving too many people behind in this first recession in three decades,” he said.