Australia’s apex bank, The Reserve Bank, cuts interest rates to record low of 0.1% following COVID-19 recession

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Australia's apex bank, The Reserve Bank, cuts interest rates to record low of 0.1% following COVID-19 recession
Australia's apex bank, The Reserve Bank, cuts interest rates to record low of 0.1% following COVID-19 recession
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The Reserve Bank has cut interest rates to a record low of 0.1 per cent as the bank’s governor confirmed Australia was not out of recession.

Key points:

  • The official cash rate is expected to remain at 0.1 per cent until 2024
  • Reserve Bank Governor Philip Lowe says the unemployment rate is likely to peak at 8 per cent and drop to 6 per cent by the end of 2022
  • Dr Lowe said the cash rate was very unlikely to drop below zero because it would not help stimulate spending

The cut to 0.1 per cent is down from the previous record low of 0.25 per cent, which was announced earlier this year, and is not expected to increase for at least three years.

Alongside the drop in the official cash rate, the RBA lowered its three-year bond rate target to 0.1 per cent. The new record-low rate will also apply to the bank’s term funding facility.

The central bank confirmed it would buy $100 billion worth of Australian government bonds over the next six months to lift inflation and encourage lending and investment — a measure known as quantitative easing.

Reserve Bank Governor Philip Lowe stressed the bank was not printing free money for the state and federal governments and the bonds bought by the RBA would have to be repaid by governments at maturity.

“They’ll have to be repaid in exactly the same way as if the bonds were held by others,” he said.

Reserve Bank of Australia
Reserve Bank of Australia

The bond purchases will be bought on the secondary market and split, with 80 per cent to be federal government bonds and 20 per cent state government bonds.

This is in addition to the more than $60 billion the bank has spent since March on buying three-year government bonds.

Other elements of today’s package include:

  • A reduction in the target for the yield on the three-year Australian government bond to around 0.1 per cent
  • A reduction in the interest rate on exchange settlement balances to zero

Dr Lowe said the measures would help address the high rate of unemployment, which he described as an “important national priority”.

The combination of the RBA’s bond purchases and lower interest rates is expected to help the country recover economically by lowering financing costs for borrowers, contributing to a lower exchange rate and supporting asset prices and balance sheets.

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Dr Lowe said the bank was “committed to doing what it can to support the creation of jobs”.

“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago,” he said.

“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”

Dr Lowe said the RBA would purchase bonds “in whatever quantity is required to achieve the three-year yield target”

Chief economist for BIS Oxford Economics Sarah Hunter said the RBA’s decision to cut the cash rate was as expected.

Dr Hunter said the bank outlining it did not expect to raise the cash rate over the next three years would “provide households and businesses with some certainty over their individual borrowing rates in the near term”.

“The easing that has been implemented so far has already had a significant impact on the housing market; house prices are now trending up nationally and the lending data suggests this will continue in the near term,” Dr Hunter said.

Lowe says cash rate ‘extraordinary unlikely’ to drop further

Dr Lowe said despite some media reports, Australia was not out of recession and said the Reserve Bank had more monetary “firepower” to use if necessary.

But he said dropping the cash rate below zero was “extraordinarily unlikely”.

“While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more,” he said.

“We’ve done as much as we can on interest rates and the focus now is really on the quantitative asset purchases.”

Dr Lowe said the announcements on Tuesday were not made earlier in the pandemic because monetary easing was likely to get more traction today than “when widespread restrictions were in place”.

“In earlier months, the usual transmission mechanisms were not working as normal and the challenges facing the country were best addressed by other policy tools.

“However, as restrictions are eased and people have more opportunities to spend, our judgement is that further monetary easing now provides additional support to other policies, including the fiscal initiatives and the RBA’s earlier monetary policy package.”

Dr Lowe also said the cash rate was very unlikely to drop below zero.

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Unemployment expected to peak at 8 per cent

Dr Lowe said Australia could expect positive GDP growth in the September quarter despite the restrictions in Victoria.

“In the central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022,” he said.

Official estimates last month put the jobless rate at 6.9 per cent, with 937,400 people out of work.

But the pandemic and various Government support measures mean that number understates the unemployment crisis, with more than 1.5 million people on JobSeeker benefits.

Philip Lowe stands at a lectern with a microphone. Behind him is a screen with multi-coloured squares
Philip Lowe, governor of the Reserve Bank of Australia, said Tuesday’s decision reflect the bank’s commitment to support the recovery of the Australian economy.(ABC News: John Gunn)

Dr Lowe said the country’s unemployment rate was likely to remain high, but would peak slightly below 8 per cent, rather than the 10 per cent previously expected.

He said it was forecast to drop to 6 per cent at the end of 2022.

The period of high unemployment would result in low wage growth and prices over coming years, Dr Lowe said.

Inflation is forecast to be 1 per cent in 2021 and 1.5 per cent in 2022.

Dr Lowe warned the cash rate would not increase “until actual inflation is sustainably within the 2 to 3 per cent target range”, which will require wages growth and “significant gains in employment”.

Homeowners eager for rate cut to be passed on by banks

A woman and her husband stand hugging each other in their front yard. Behind there is a swing set and their brown brick home.
Verity and Mark Riessen have welcomed the rate cut which will help their family finances as Verity’s JobKeeper allowance is wound down.(ABC News: Lincoln Rothall)

Adelaide homeowners Mark and Verity Riessen are eagerly waiting to see how much of the rate cut will be passed on to them by their lender.

“The last rate cut the RBA passed through, was not passed on to us by our lender,” Mr Reissen said.

The couple bought their home in 2006.

Two lots of refinancing and three children later, they still have another 25 years left on their mortgage, which they’re currently paying off with a variable home loan at an interest rate of 3.2 per cent.

The Riessen’s are preparing to look elsewhere if their lender does not pass on the cut.

“I’ll be looking either to negotiate a lower interest rate or looking to another lender,” Mr Riessen said.

“Our current lender is offering an interest rate to new loans at 0.7 per cent lower than what we’re currently paying, so if we are a loyal customer I would expect our lender to be able to look after their current customers the same way they’re looking after new customers.”

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The family’s income has been cut and their expenses have increased since the COVID-19 pandemic hit.

The move to at-home learning earlier in the year meant the family needed to spend a lot more money on technology for their three children.

“We had to spend a lot more money investing in iPads and things like that, so our kids didn’t miss out.”

Ms Riessen said even the smaller than usual 15 basis point cut by the RBA would help, if it was passed on to them in full.

“Those little bits of money that could come through a lower interest rate can actually make a huge difference.”

Savings accounts take another hit

Finance professional Ankita Gangaramani is trying to save the thousands of dollars she will need for the application and legal fees required to become a permanent resident in Australia.

But with another cut to the official interest rate, she’s probably going to get some bad news from her bank about how much interest she will be able to earn on the money in her account.

Having managed to pay off the $40,000 loan she obtained for a Masters in Business Administration, Ms Gangaramani is now focusing on building her savings while working in the finance sector.

“Building up savings is a time-consuming process,” she said.

A 25 year old Indian woman with long dark hair, wearing a black jacket, sits with her arms in her lap smiling to the camera.
With interest rates at a record low, Ankita Gangaramani is earning very little interest on the cash in her bank account.(ABC News: Dan Irvine)

“It’s going to be a while before I can collect the amount I need for the permanent residency.”

It will cost about $6,000 in administration and legal fees for Ms Gangaramani’s permanent residency application.

She has a savings account with one of the big four banks, but her interest rate has been steadily falling with each cut introduced by the RBA.

“Earlier, it used to be about a percentage, so one per cent of my total earnings, but now the percentage has obviously fallen,” she told ABC News.

The interest rate on her savings account is now 0.05 per cent.

“It’s really impacted me in terms of the amount of interest I gain on the actual savings that I make, so my money isn’t exactly growing.”

She’s concerned today’s cut by the RBA will mean her interest rate will be slashed even closer to zero.

“Every dollar counts and it’s just not going to be the most ideal scenario for me if the developments are that the interest rate falls even further.”

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