The Reserve Bank of Australia has widened its policy of quantitative easing (QE) and slashed the official cash rate to a historic low of 0.1% to boost jobs and get the nation’s economy growing faster.
After the Bank’s Melbourne Cup day meeting, RBA governor Dr Philip Lowe said the cash rate would be cut to just 0.1% – following on from the emergency out of cycle cut to 0.25% in late March during the worst of the COVID-19 pandemic.
The RBA is also expanding its bond-buying program to purchase $100 billion-worth of bonds over the coming six months, concentrating on five and 10-year government bonds to bring longer term rates down.
Bond buying spree to flatten rates out to ten years
This is on top of the more than $60 billion the bank has been spending since March on three-year government bonds to force short term rates lower.
The bond spending spree will be 80% federal government bonds and 20% state government bonds, with all purchases to be made on the secondary market and not direct from governments.
Such bond buying will also act as an economic stimulus for export industries by keeping the Australian dollar weak.
Other measures included a statement from Dr Lowe that it would be some time before the bank would consider an interest rate rise and cutting to 0.1% is charging the nation’s banks on a $200 billion line of credit to offer cheap loans to small and medium-sized businesses.
RBA urges banks to lend
The RBA will now not pay any interest to banks that leave money overnight with it to further encourage lending to customers.
If banks pass on the full 0.15% interest rate cut to borrowers, it will save around $23 a month for borrowers with a $300,000 mortgage.
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Dr Lowe said in the RBA statement.
That includes ramping up QE to buy more bonds and flatten the longer-term yield curve and to give guidance that rates will not be raised until inflation is back in the range of 2-3%.
Outlook improving but recovery will be bumpy
“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,’’ Dr Lowe 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.”
“The board will not increase the cash rate until actual inflation is sustainably within the 2% to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market,” he said.
High unemployment to be met with low rates for three years
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs.”
“Given the outlook, the board is not expecting to increase the cash rate for at least three years,” Dr Lowe noted.
While Dr Lowe said the economy was recovering, the RBA’s actions are an admission that the employment market will take a much longer time to recover and is dependent on the COVID-19 pandemic remaining under control.
Savers being forced to take more risks
By forcing more savers to buy riskier assets to earn a return on their money, the RBA’s actions are sure to boost investment and probably prices in other asset classes such as property and shares, with the share market rising before and after the announcement.
The cut is sure to increase the already large amount of refinancing of mortgages that is taking place as home owners and investors work hard to reduce their costs even as banks and other institutions try to hang on to some of the interest rate cuts by keeping loan rates higher.
If Australian banks did pass on the full 0.15% cut, the average variable home loan interest rate would fall to 3.19% from 3.34%, although some special loans are already much lower.
Customers need lower mortgage rates as JobKeeper and JobSeeker wind back
With Jobkeeper and Jobseeker support payments being progressively wound back and bank mortgage holidays coming to an end, customers will be keen to ensure their mortgage rates are competitive.
While lower rates are great news for borrowers including individuals and companies, they are terrible news for pensioners and savers who are already dealing with extensive rate cuts on cash accounts and term deposits.
Under the RBA’s central scenario, GDP growth will hit 6% over the year to June 2021 and 4% in 2022.
The bank also anticipates unemployment will stay high, peaking just below 8%, which is better than earlier scenarios of 10%.
The unemployment problem also poses headwinds for wage growth and inflation, with Dr Lowe predicting inflation will be just 1% in 2021 and 1.5% in 2022.