No more cuts: RBA declares cash rate reached “effective lower bound”

Following March’s unprecedent mid-cycle rate cut, at its meeting today the Reserve Bank elected to hold rates at 0.25%.

Based on the minutes of last month’s emergency meeting, today’s decision was largely anticipated.

Released last week, minutes from the special monetary policy meeting which occurred on March 18 revealed that the board was in agreement that the cash rate had reached its “effective lower bound,” and that “members had no appetite for negative interest rates in Australia.”

But if rates will not be cut any further, how does the Central Bank plan to handle the economy?

The surprise announcement

Covid-19 has been putting strain on economies worldwide, and Australia is no exception.

Where the RBA usually meets on the first Tuesday of every month, last month the RBA called an unprecedented ‘emergency’ meeting to discuss the “economic effects of the novel coronavirus disease.”

During this meeting, it was agreed that the cash rate would be lowered to 0.25% and that the RBA would begin engaging in a form of quantitative easing – announcing it would be buying government bonds from the secondary market.

Following the cut, ANZ was one of the few lenders to cut variable interest rates (0.15% cut).

However, the Big-4 all announced fixed rate reductions.

  • ANZ – Announced a fixed rate adjustment to 2.19%p.a. on their 2-year fixed rate for owner occupiers making principal and interest repayments.
  • CommbankAnnounced a 0.70% cut on 1, 2 and 3-year fixed rate loans (2.29%p.a. from 1 May).
  • NAB – Announced a cut of up to 0.60% on fixed-rate loans.
  • Westpac – Announced a fixed-rate adjustment to 2.29%p.a. on 1,2 and 3-year loan terms which are part of their Premier Advantage Package (owner occupier customers)

Unconventional Monetary Policy

Quantitative easing ((QE), otherwise known as ‘printing money’, is unconventional monetary policy – and now that rates are unlikely to fall any further, it has started in Australia.

According to The Australian, so far the RBA has bought $22 billion dollars worth of Commonwealth government bonds, and $5 billion dollars of state government securities. 

Through the policy, the RBA hopes to get the economy moving. 

With the RBA buying bonds from the government, the government gains more money at their disposal, which it can in-turn funnel into the economy.

What are the downsides of quantitative easing?

Until now, Australia had never engaged in unconventional monetary policy, but during the Global Financial Crisis (GFC) it was introduced in many other advanced economies.

In these countries unconventional monetary policy was able to help ensure that following the GFC, economies could keep credit available amid a stressed financial market. This helped to keep the economy ticking – safeguarding ongoing economic activity and helping these markets avoid deeper recessions.

England was one of these countries; implementing quantitative easing in 2009. Now, over a decade since, England is still ‘printing money’, and following the Coronavirus pandemic gripping all economies, the Bank of England has recently slashed interest rates to just 0.1%.

But despite the ongoing linger of QE, most would agree that alternative monetary policy was the right decision for England’s economy. Many believe that it helped prevent ‘the second Great Depression’, however, there have also been reports that it’s caused rising inequality.

According to the RBA, some potential side effects to unconventional monetary policy can be argued.

On its website the RBA lists the rise of asset price growth as one of these, noting that under low interest rates this could have a potential impact.

 “persistently low interest rates can fuel asset price growth (e.g. rising prices of houses and shares) despite weak economic growth,” the RBA notes.

…so that growth in debt can become unsustainable and increase the risk of financial instability.” 

Will interest rates go back up?

While interest rates will likely rise again at some point in the future, The RBA has indicated that it won’t be anytime soon. 

In the previous minutes, the RBA detailed that it expected the cash rate “would remain at a very low level for several years”.

It is anticipated that no positive cash rate moves will be made until progress is made towards full employment and inflation reaches a sustainable 2-3%.

From eChoice

Disclaimer: Please read

View

These articles provide you with factual information only, and are not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. The information in these articles is believed to be reliable at the time of distribution, but EFS does not warrant its completeness or accuracy. Neither EFS nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in these articles. For information about whether a loan may be suitable for you, call EFS on 02 8041 6746.