Question

Explain and compare the responses of the FED and RBA (Australia) response to COVID

use graph if possible

Answer 1

The outbreak of COVID-19 is primarily a public health issue, but it is also having a major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and implemented social distancing measures. The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.

The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary policy, play an important role in reducing the economic and financial disruption resulting from the virus.

At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.

How the Reserve Bank is supporting the Economy

The Reserve Bank has put in place a comprehensive package to lower funding costs and support the supply of credit to the economy.

Lower the cash Rate Target to 0.25 per cent

The Reserve Bank Board reduced the cash rate twice in March 2020, to 0.25 per cent. This is boosting the cash flow of businesses and the household sector as a whole. It is also helping Australia's trade-exposed industries through the exchange rate. At the same time, low interest rates do have negative consequences for some people, especially those relying on interest income. The Reserve Bank Board has discussed these consequences, but the evidence is that lower interest rates do benefit the community as a whole.

The Board also annouced that it will not increase the cash rate target untill progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band.