By James Glynn 



  SYDNEY--The Reserve Bank of Australia is maintaining the policy position it first established in March to combat the sharp economic downturn brought on by the Covid-19 pandemic. 


  RBA Gov. Philip Lowe on Tuesday reaffirmed the central bank's 0.25% target for the yield on three-year government bonds, adding that he still expects interest rates to remain ultra-low for some time. 


  The official cash rate was held at a record-low 0.25%. 


  The RBA increased the size of its term funding facility to $200 billion Australian dollars (US$$147.52 billion) in a move aimed at keeping interest rates low while supporting loan provisions. 


  "There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows. Government bond markets are functioning normally," Mr. Lowe said. 


  The RBA is mostly upbeat on the economic recovery, saying the downturn isn't as severe as feared. Still, the road ahead will be difficult. 


  "This recovery is likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy," Mr. Lowe said. 


  The RBA comments come a day before the release of economic growth data for the second quarter that are expected to confirm the economy sunk into its first recession in nearly 30 years, with recovery expectations under a cloud as the key state of Victoria battles a resurgence of the virus. 


  Mr. Lowe has called on state governments for more spending, saying that is the best answer to the economic downturn. He has also downplayed speculation that the RBA might consider something like a move to negative interest rates. 


  Recent media reports suggest Mr. Lowe had approached state government leaders, urging them to sharply increase infrastructure spending. 


  Still, the RBA is open to doing more if required. 


  "The board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery," Mr. Lowe said. 


  Australia has been able to largely contain the spread of Covid-19. However, Victoria, which accounts for around one-quarter of the economy, has been forced back into strict lockdowns. 


  Economists have downgraded their forecasts for national GDP growth because of the situation in Victoria. 


  Data earlier on Tuesday showed consumer confidence, household spending and manufacturing activity have all been directly affected by the slowdown in Victoria. 


  House prices have also fallen for four months in a row, according to Corelogic. 


  Write to James Glynn at james.glynn@wsj.com 

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