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Cash rate at ‘unprecedented’ low

At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic.

Statement by Philip Lowe, Governor: Monetary Policy Decision

With Australia facing a period of high unemployment, the Reserve Bank is 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. 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 elements of today’s package are as follows:

·         a reduction in the cash rate target to 0.1 per cent

·         a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent

·         a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent

·         a reduction in the interest rate on Exchange Settlement balances to zero

·         the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.

Tim Lawless, CoreLogic Head of research comments 

Today’s cut takes the cash rate target to an unprecedented low. If passed on by the banks, which is highly likely, we will see mortgage rates fall further from their already record lows.  Historically cuts to interest rates have fuelled housing market activity and generally aligned with upwards pressure on dwelling prices.   With the trend in housing values already rising around most areas of the country, there is a good chance lower rates could see momentum building across the nation’s most valuable asset class. 

The RBA’s primary focus from lower interest rates is to ensure businesses are confident enough and willing to invest, as well as encouraging households to spend.  With this in mind, the RBA is likely to look through the ‘noise’ of higher housing prices in an effort to stimulate business investment, jobs growth and household consumption. 

The stimulus of such extremely low interest rates, together with the initiatives announced in the federal budget and state level incentives like stamp duty concessions and building grants, are likely to be enough to outweigh the headwinds facing the market. Headwinds include the wind down of fiscal support such as JobKeeper, and the expiry of home loan repayment deferrals, which are moving through their peak period of expiry this month. 

If housing market conditions generate too much risk through rising prices, particularly in the lending space, policy makers might consider other mechanism that will allow interest rates to stimulate the economy, but keep a lid on house price appreciation.  Macroprudential initiatives have proven to be a rapid and effective means of quelling housing market exuberance via credit policies.  The previous Macroprudential policies were largely aimed at investor activity and interest only lending, both of which remain at modest levels at the moment.  Considering household debt levels remain close to record highs, any intervention from a Macroprudential perspective would likely be focussed around hard limits on debt to income ratios or loan to valuation ratios.

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