By Jukka Viljanmaa, Senior Investment Manager

The Reserve Bank Board met on 3 November 2020 to formulate monetary policy and in particular to set the cash rate target, in line with the Board’s mandate:

“It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

1. the stability of the currency of Australia;
2. the maintenance of full employment in Australia; and
3. the economic prosperity and welfare of the people of Australia”

Reserve Bank Act 1959

Communicated via a media release post the meeting the R.B.A. announced it had implemented 5 unprecedented further monetary stimulus measures which include the following:

• A reduction in the Cash Rate Target from the current level of 0.25% to 0.10%
• Reduction in the 3-year government bond yield target from the current level of 0.25% to 0.10%
• Reduction in the Term Funding Facility lending rate from the current level of 0.25% to 0.10%
• Reduction in the interest rate banks receive for their deposits via Exchange Settlement Accounts with the RBA from the current rate of 0.10% to zero.
• Increase in the government bond yield curve control policy from purchasing 3 year government bonds in the secondary market to also purchasing 5-10 year government bonds.

These measures will further reduce borrowing costs for consumers, businesses and governments, as well as reducing the value of the Australian dollar relative to other currencies.

The reduction in the cash rate target is designed to further support consumers via lowering borrowing costs and to increase consumers’ disposable income, as well as reducing deposit rates to incentivize consumer spending rather than saving.

With Australian longer term bond yields attractive to offshore investors, the RBA is looking to lower these yields to reduce their attractiveness and reduce the need for offshore investors to purchase Australian dollars which raises the value of the currency. A lower Australian dollar will assist Australian exporters’ competitiveness and thus boost employment.

TPT Wealth Income Funds hold a diversified portfolio of Australian assets including bonds, floating rate notes, short-term money market securities and directly sourced first ranking commercial mortgages. Our Investment Team constantly review the underlying asset allocation of our Funds to provide investors a diversified portfolio of assets to manage portfolio risk. During times of a low cash environment and volatile equity markets a considered and prudent approach to investing is generally necessary to navigate investors through the cycles.

The views and opinions expressed are presented for informational purposes only and are a reflection of TPT Wealth’s Senior Investment Manager’s best judgment at the time the content was compiled.