RBA holds cash rate as attention turns to virus recovery

As predicted, the Reserve Bank of Australia decided to hold the official cash rate at a record low of 0.25% at its June meeting on Tuesday, as the nation’s unemployment rate creeps higher and inflation remains below target range. 

In a statement, RBA governor, Philip Lowe, said “the global economy is experiencing a severe downturn as countries seek to contain the coronavirus.

At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points – https://t.co/xV1urr8dQt

— RBA (@RBAInfo) June 2, 2020

“Many people have lost their jobs and there has been a sharp rise in unemployment. Over the past month, infection rates have declined in many countries and there has been some easing of restrictions on activity,” Mr Lowe said in a statement.

“If this continues, a recovery in the global economy will get under way, supported by both the large fiscal packages and the significant easing in monetary policies.”

In his opening statement to the Senate Select Committee on COVID-19 last week, Mr Lowe signalled that the Morrison Government would have to deliver fiscal support to the economy in order for Australia to move out of the “shadow” cast by the pandemic.

“A reform agenda that makes Australia a great place for businesses to expand, invest, innovate and hire people would certainly help,” he said. 

“For its part, the RBA will maintain its expansionary settings until progress is being made towards full employment and we are confident that inflation will be sustainably within the 2–3 per cent target band.

RBA won’t budge on record low cash rate for now

The Central Bank’s decision to hold the official cash rate comes despite other global markets adopting negative rates in the aftermath of the COVID-19 crisis including Sweden, Denmark, Europe (ECB), Switzerland and Japan. In recent weeks, there has been market speculation that the US Federal Reserve is poised to follow suit.

 

Any lift in Australia’s cash rate appears to remain a long way off, said Cameron Kusher, executive manager – economic research at realestate.com.au. 

“The cost of borrowing for individuals and businesses sits at historic lows and is likely to remain at this level for some time,” Mr Kusher said. “The RBA has also continued to state its reluctance to take official interest rates to zero or below, however, depending on how the economy recovers it may be something that they consider further down the track.

“The extremely accommodative monetary policy settings can hopefully assist with the economic recovery as the country slowly moves away from COVID-19 restrictions.

“The RBA appears to now be firmly focused on imploring the Federal Government to provide additional fiscal stimulus to aid the recovery.”

Monetary policy as we know it is no longer working

Chief economist at realestate.com.au, Nerida Conisbee, said the RBA’s decision to hold the cash rate shows the monetary policy we are used to is no longer effective in driving economic growth.

“The RBA is likely to continue to use quantitative easing measures to help drive economic growth, however, this will not be enough and other forms of government intervention are needed,” Ms Conisbee said.

“Already we are seeing state governments look to other ways to drive jobs growth and the economy including infrastructure spending, relaxing planning controls and targeted spending programs.

“The Federal Government continues to announce stimulus packages that will also assist – this week we are expecting to see a program that drives new home construction.”

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Construction site

The Federal Government is expected to announce this week a stimulus package to drive job in the construction industry. Picture: Getty.


The Federal Government has a plan for economic recovery

The Property Council of Australia has communicated the Federal Government’s bold plan for economic recovery, in which Prime Minister Scott Morrison called for “fresh thinking to get Australians back into jobs and a harnessing of the goodwill shown in the face of the health crisis.”

Under the plan, government and industry would work together to get Australians safely back to work; inject confidence into households and consumers; get business investing again; restore the traditional drivers of Australia’s economic growth (skills, investment and trade) to find new sources of economic strength and; set the country on a permanent high-productivity trajectory.

While we still have no official news it seems as if the Federal Government is planning some fiscal stimulus for the construction and arts sectors and potentially other sectors such as tourism, retail and higher education will also need additional government support,” Mr Kusher said. 

It’s a good time for mortgage holders to plan their own recovery

It’s clear Australia is at the start of a long road to recovery, which mortgage holders should take advantage of to get ahead of their finances, said Sam Boer, chief executive of Smartline mortgage brokers. 

Armadale house

Mortgage holders would be smart to take advantage of record low interest rates to get ahead of their debts. Picture: realestate.com.au/buy.


“Now is a great time for consumers to get their own economic recovery plan into place and it starts by reviewing your mortgage and speaking with your personal mortgage adviser about all the low rate offers and incentives that are currently available,” Mr Boer said.

“Lenders are still open for business and doing deals”.