Cash rate holds amid historic economic downturn

Cash rate holds amid historic economic downturn

As anticipated, at Tuesday’s meeting the Reserve Bank of Australia (RBA) elected to hold the official cash rate at its historic low of 0.25%.


The announcement came as no surprise given comments made by the board in recent months.

In its June minutes, the board noted it would not be increasing the cash rate until the target for the yield on three-year Australian Government bonds is removed and progress is made towards inflation goals and full employment.

“… it would be appropriate to remove the yield target before the cash rate itself is raised,” the RBA said.

“The Board determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”

The three-year yield target was announced during the RBA’s emergency meeting on 19 March this year in a bid to help lower funding costs across the economy.

As it stands, the target has been successful in remaining steady at around 25 basis points and the bank’s total spending in the secondary market has been approximately $50 billion.

‘Shallower’ economic hit than first thought?

In its June minutes the RBA conceded it’s possible the COVID-19 economic hit could be “shallower” than first thought, although it warned the outlook is still uncertain, noting the pandemic is “likely to have long-lasting effects on the economy”.

For many the earlier than anticipated easing of restrictions and low infection rates have been beacons of hope for a smaller economic downturn than originally predicted amid what is still a historically large economic decline.

During a webinar address to the Economic Society of Australia on 30 June, RBA Deputy Governor Guy Debelle said while the economy is performing better than anticipated, fiscal and monetary policy support will continue to be necessary.

“Recent data indicates that the outcomes in the Australian economy have been better than earlier feared. But we should not lose sight of the fact that the decline in the economy and the impact on households and businesses is historically large,” he said.

“… It is still quite likely that this decline will have a long-lived impact that will require considerable policy support for quite some time to come. While much of that support is likely to be on the fiscal side, the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available and stands ready to do more as the circumstances warrant.”

Job losses continue

Recent ABS Labour Force data showed a May spike in unemployment, following the pattern of recent months.

During May, the number of people unemployed increased to 927,600, equating to a 0.7 pts rise to a rate of 7.1%.

To put it in prospective, at the end of 2019 the unemployment rate sat at just 5.1%.

Indeed Asia-Pacific economist Callam Pickering however, believes the 7.1% figure is understated, telling Business Insider it’s closer to 11.3%.

“The unemployment rate is widely considered to be understated, including by the ABS themselves, with the actual rate closer to 11.3%. That translates into around 12 unemployed people per job vacancy,” he said.

In its media release the ABS noted a lesser-than-expected increase to the unemployment rate is partly due to a larger than usual number of employed and unemployed people leaving the labour force.

In May, the participation rate fell by 0.7 pts to 62.9%, following a 2.4 pts decrease in April. The participation rate has not sat below 63% since January 2001.

Home refinancing

Home loan refinancing still stands to be a strong option for mortgage customers as the cash rate continues to hold.

Through refinancing, many customers can access much lower rates, equating to increased savings.

Smartmove mortgage adviser Michael Letts told the ABC that due to current low interest rates, as well as competition between the banks to secure customers, there has been an influx of enquiries for refinancing services.

“The banks have started to offer attractive rebates, and fixed rates are quite low and very attractive, so naturally there’s been an influx of inquiry,” he said.

According to ABS data, between March and April 2020 the number of people refinancing their home loans rose by 11%.

Furthermore, CoreLogic’s recent Early Market Indicators Report showed that on the week ending 28 June the percentage of mortgage holders refinancing was up 33.09% on the same week last year.

Additionally, refinancing made up 68.46% of the total loans written on the week ending 28 June, with the second highest category being new purchases at just 23.08%.

RateCity.com.au Research Director Sally Tindall told the ABC customers were beginning to release the power they hold with the banks.

“Australians are increasingly starting to realise they have to act on their mortgage if they want to save money,” she said.

“We expect this rate war to intensify, despite the fact mortgage rates are already at record lows.”

From eChoice

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