The Reserve Bank has kept its official interest rate at record lows as the Australian economy continues its slow recovery from the COVID-19 recession.
- The Australian dollar jumped to 72.08 US cents after the decision
- Economists are predicting the RBA will cut rates to 0.1pc by the end of 2020
- The RBA has kept rates on hold for seven months in a row
As expected, the RBA decided to maintain its cash rate target at 0.25 per cent, just hours before the Treasurer is due to unveil his long-awaited Federal Budget.
The central bank also kept its target yield for three-year government bonds at that same level.
“A recovery is now underway in most of Australia, although the second-wave outbreak in Victoria has resulted in a further contraction in output there,” RBA governor Philip Lowe said in a statement, accompanying the rates decision.
He also said the RBA and Government would need to continue supporting the economy “for some time given the outlook for the economy and prospect of high unemployment”.
The RBA governor’s warning comes a week after the Government scaled down its JobKeeper and JobSeeker payments for millions of workers and unemployed Australians.
Economists are predicting the Government will announce a Budget deficit of about $220 billion for the current financial year, or 12 per cent of GDP — which would mark its largest deficit since World War II.
The Australian dollar briefly jumped (+0.4pc) to 72.08 US cents after the rates decision.
But within minutes, the local currency drifted back to where it was before the RBA decision (71.9 US cents).
High unemployment and more stimulus
Last month, Australia’s unemployment rate slipped to 6.8 per cent, a big fall from the 22-year high in July (when it hit 7.5 per cent).
Dr Lowe previously anticipated the jobless rate might rise to 10 per cent by the end of this year. But he now thinks it is “likely to peak at a lower rate than earlier expected”.
“The [RBA] Board views addressing the high rate of unemployment as an important national priority.”
After the 1990s recession, it took a decade for the jobless rate to fall back to its pre-downturn levels.
The RBA cut rates to a record low 0.25 per cent at its emergency rate cut in March, and it has stayed at that level for seven consecutive months.
At that meeting, the RBA also began its first-ever quantitative easing program — buying Australian government bonds to keep yields low, which results in cheap loans for the nation’s banks.
The central bank has purchased $63 billion worth of Government bonds since March, including a $2 billion spend as recent as last month.
The RBA governor also left the door open for an upcoming interest rate cut.
He noted the yield on three-year bonds had fallen to 0.18 per cent in the last couple of weeks “as markets price in some probability of further monetary policy easing”.
“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further.”
The governor also hinted low rates and plenty of stimulus will remain for “as long as is required”, which could be several years.
He added that no interest rate hikes will happen until progress is made towards “full employment” (a 4.5 per cent jobless rate), and once inflation is “sustainably within the 2–3 per cent target band”.
Rate cut speculation abounds
In reality, the official cash rate is already at 0.13 per cent, which is lower than the RBA’s “target” of 0.25 per cent.
This has fuelled speculation that the central bank may cut rates as soon as next month.
“Despite the October rate hold, 22 per cent of experts (nine out of 40) predict that a cut could still be on the cards in November,” said Grahame Cooke, the insights manager at comparison website Finder.
He believes that even if the RBA cuts rates by 0.15 percentage points (or 15 basis points) next month, that is “unlikely to have much of an impact on Australia’s economy”.
In the past fortnight, some economists were predicting that the RBA might have decided to slash rates today as part of a unified “Team Australia” move, adding to the stimulus measures the Morrison Government is set to announce tonight.
This would have brought the official cash rate to a fresh low of 0.1 per cent.
But the view that prevailed was that the RBA would prefer to give the Budget “centre stage”, holding off on any rates cuts until next month (at the earliest).
The rate cut speculation was fuelled by a speech delivered by the RBA’s deputy governor, Guy Debelle, on September 22.
Dr Debelle said the RBA was assessing various options like rate cuts, negative interest rates, intervening in currency markets, and buying longer-term government bonds (with maturity dates beyond three years).
Economists from Westpac, followed by AMP Capital, HSBC and UBS, were predicting an October rate cut as the most likely option.
Last month, the central bank announced more stimulus measures, by extending its term funding facility.
Essentially, the RBA is lending the banks, collectively, up to $200 billion (at the low rate of 0.25 per cent) for three years.
The purpose of this scheme is for the banks to then lend that money to small and medium-sized businesses struggling under the weight of the pandemic.