Market Outlook

Reserve Bank of Australia Response to COVID-19:
A Closer Look

By Anthony Kirkham
6 April 2020

Governments and central banks around the world have responded to the economic implications of COVID-19 by rolling out unprecedented monetary and fiscal policy responses. To date, in an Australian context, the federal and state governments’ measures announced amount to approximately A$200 billion or 10% of GDP. Together with the Reserve Bank of Australia (RBA), there have been several policy initiatives announced over the course of the COVID-19 crisis, with each policy packing in more stimulus than the one preceding it. That being said, whilst quantitative easing (QE) can broadly define many of the central banks’ responses, “the devil is in the details” as the saying goes with the “Aussie” programme offering some nuances which make it a more targeted, and potentially a more effective set of policies.

In this blog post, we further discuss the details of what we view as the three key components of the four-part package announced by Governor Lowe on 19 March and share our assessment of the potential impact of each on the Australian economy as well as fixed-income markets.

Rate Cut to 25 bps and Yield Curve Control

In our view, the RBA’s emergency rate cut of 50 bps in total to a record low of 25 bps will clearly result in an across-the-board impact. Both households and businesses will see reducing funding costs and exporters are likely to see further help via the exchange rate channel. The commitment, or lack thereof, from the RBA to a time limit on this emergency cash rate is an important message to the economy and Governor Lowe’s direct link to the RBA’s objective of generating a sustained inflation rate of 2%-3% per year and to an unemployment rate that approaches the non-accelerating rate of unemployment (NAIRU) of 4.5%, provides the market with clear signposts for future upward movements in the cash rate.

Over and above the emergency rate cut, the RBA announced a yield curve control policy specifically targeting a 3-year government bond yield of “around” 25 bps. The benefit of the initiative is that the yield curve remains anchored to the cash rate and alleviates investors’ concerns that significant new supply of government and semi-government bonds will find an investor base. Furthermore, the 3-year yield is a key funding rate and lower yields at this key rate will benefit the pricing of all financial instruments and assist liquidity in government bonds and semis which has been challenged during the crisis. The RBA’s actions have quickly flowed through to market pricing, as demonstrated in Exhibit 1.

Exhibit 1: Australian Government Bond Yield Curve

Source: Bloomberg. As of 02 Apr 20. 

The target yield will be achieved by allowing broad-based buying by the RBA of both government and semi-government bonds across the curve, with no limit on the timing or quantity of purchases. The RBA’s action in the open market has been remarkable and unprecedented with the RBA purchasing A$30 billion in bonds from 20 March to 1 April.

A Term Funding Facility for the Banking System and Support for Non-Banks

The RBA concurrently announced an “at least” A$90 billion term funding facility (TFF) at a fixed rate of 25 bps. This is largely targeted towards small and medium-sized enterprises (SMEs) but will bring down funding costs across the board. The RBA has made the SME sector a target through an incentive structure whereby banks will be given the opportunity to increase their initial allowance within the facility (set at 3% of outstanding credit) if they increase their outstanding credit to SMEs. The incentive is significant, as banks will receive an increase in their allowance of five times the dollar increase in credit outstanding. In addition, the federal government further enhanced the TFF through the extension of loan guarantees to SMEs whereby they will assume 50% of the credit risk on new lending.

The focus on SMEs is welcomed as this area of the economy stands to be the most affected by the COVID-19 driven economic slowdown. Moreover, small businesses are an area of the economy that provides 44% of private sector jobs, but have experienced stubbornly high interest rates relative to recent moves in the RBA cash rate and housing lending rates (Exhibit 2). Therefore, the TFF will offer much-needed financial support over and above the significant policies put forward by federal and state governments.

Exhibit 2: Home Lending and Small Business Lending Rates vs. RBA Cash Rate

Source: RBA. As of 29 Feb 20. 

Operationally, funding under the TFF will be extended under repo agreements which is notable as it may result in downward pressure on the yields of government bonds, semis and AAA rated supras as banks accumulate stock given their eligible security status for RBA repos.

The banks’ regulator, the Australian Prudential Regulation Authority (APRA), has also come to the party to support the TFF by temporarily changing its expectations around bank capital ratios. Although APRA has not provided banks with a specific CET1 ratio, it has stated that it “would not be concerned” should banks fail to meet the benchmark set in 2017 of 10.5% of risk-weighted assets over this period. APRA noted the excess capital buffer that Australian banks have built post the global financial crisis (GFC) are clearly sufficient if the banks were to reduce this to ensure the provision of credit at this time.

Non-bank lenders, who rely heavily on securitisation markets, have also received policy support that ensures access to cheaper funding and continued flow of credit to their customers. Specifically, the Australian Office of Financial Management (AOFM) will invest A$15 billion in RMBS and other ABS issued in the primary market as well as provide financing for securitisation warehouses.

From a sector perspective, cheaper funding, meaningful incentives and multilateral support to grow business lending books is likely to create a profitable venture for the bank and non-bank sector. Given the already healthy capital buffers of the banks (Exhibit 3) both versus APRA benchmarks and international peers, we do not see an expected reduction in the CET1 ratios as a material issue for banking credits.

Exhibit 3: Pre and Post-GFC CET1 Ratios for Major Australian Banks

Source: Western Asset. CBA as of 30 Jun 19. WBC, NAB, ANZ as of 30 Sep 19. 


We believe the RBA, the Australian government, APRA and the major banks have come together to offer and support a set of programmes that are fit for purpose by targeting measures that reflect the dominance of the services sector in the Australian economy. It remains to be seen what further programmes are deployed as the spread of the virus continues and as the community faces even more restrictions on its ability to generate economic activity. In the last seven days alone, the pace of fiscal policy announcements has been frenetic with the federal government announcing an A$130 billion “JobKeeper” wage subsidy and an A$1.6 billion childcare stimulus. Likewise, it is difficult to get a timely read on the effects of the current set of programmes in order to make an assessment of their success. What is clear is the multilateral commitment to offer a set of policies to keep the Australian economy on life support. We expect this collaboration to continue and commend the authorities and banks for their work done to date.

Anthony Kirkham is a Portfolio Manager for the Legg Mason Western Asset Australia Bond Fund, also available as an Active ETF (BNDS). Learn more:

Legg Mason Western Asset Australian Bond Fund
BetaShares Legg Mason Australian Bond Fund (managed fund) (ASX: BNDS)



  • Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

    Important Information 

    All investments involve risk, including possible loss of principal.

    The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

    Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

    International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

    Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

    Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

    Important Information:

    The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

    The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

    This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

    This material is only for distribution in those countries and to those recipients listed.

    All investors and eligible counterparties in EU and EEA countries:

    In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

    In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.

    In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH.

    Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

    All Investors in Hong Kong and Singapore:

    This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

    This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

    All Investors in the People’s Republic of China (“PRC”):

    This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

    This material has not been reviewed by any regulatory authority in the PRC.

    Distributors and existing investors in Korea and Distributors in Taiwan:

    This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

    This material has not been reviewed by any regulatory authority in Korea or Taiwan.

    All Investors in the Americas:

    This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

    All Investors in Australia and New Zealand:

    This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

    The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.