Australia’s central bank promises it has not run out of firepower to support the coronavirus-hit economy after cutting interest rates to record lows, ensuring the cost of finance remains low for years to come for home buyers and all borrowers.
The Reserve Bank of Australia cut the official cash rate and other key policy rates to 0.1% on Tuesday in what will be the last rate move for at least three years and likely longer.
The RBA is now relying on unconventional monetary policy to help support the economy through a bumpy and drawn-out recovery from the coronavirus pandemic, the biggest economic shock in more than 100 years.
The RBA’s package of measures involved:
- A cut in the cash rate target, the interest rate on the term funding facility (the rate at which the RBA provides low-cost funding to the banks for three years) and the three-year bond yield target, which were all cut to 0.1% from 0.25%;
- A reduction in the interest rate on exchange settlement balances to zero, from 10 basis points;
- The introduction of a program of government bond purchases, involving the RBA buying $100 billion of government bonds over the next six months.
Mr Lowe said the package would lower the whole structure of interest rates in Australia.
He said the RBA was lowering the cost of finance for everybody, not only the government.
“I should point out that our actions are also lowering the cost of finance for all other borrowers in Australia, whether they are a household buying a home or a business wanting to expand.”
What is the outlook for interest rates?
Official interest rates will not be going up for years, nor does the RBA plan to take them into negative territory.
Mr Lowe said the RBA Board did not expect to increase the cash rate for at least three years.
He said the cash rate would not be lifted until actual inflation was sustainably within the RBA’s 2-3% target range. For that to happen, wage growth would need to be materially higher than it is currently, which required significant gains in employment and a return to a tight labour market.
Mr Kusher said those comments from the RBA were much more definitive than in the past.
“While they’ve said that it’s not going to be increased for at least three years, in reality that could be five years or longer,” he said.