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News & Analysis

The RBA has cut Australian interest rates to just 0.1%

- November 3, 2020 3 MIN READ
Photo: AdobeStock

 

The Reserve Bank of Australia (RBA) has cut interest rates by 15 basis points to a new record low of 0.1%.

The cut was widely expected by markets.

RBA Governor said in his statement that the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic.

“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,” he said.

“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%
  • a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1%
  • a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%
  • 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.

The RBA plans to buy bonds, issued by the Australian Government and by the states and territories in an expected 80/20 split via the secondary market as soon as this Thursday.

The bank said any bonds purchased to support this target would be in addition to the $100 billion bond purchase program previously announced.

The move is designed in part to keep the Australian dollar from rising and putting pressure on exporters and keep borrowing costs low.

The RBA said it remains prepared to purchase bonds “in whatever quantity is required to achieve the 3-year yield target”.

The Board said the global economy has been recovering from the initial virus outbreaks, with the recovery most advanced in China, but output in most countries remains well short of pre-pandemic levels and recent virus outbreaks pose a downside risk to the outlook, particularly in Europe.

As previously reported, the central bank expects positive GDP growth in the September quarter, despite the restrictions in Victoria.

GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022. The unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10 per cent expected previously. At the end of 2022, the unemployment rate is forecast to be around 6%.

Inflation is forecast to be 1% in 2021 and 1.5% in 2022. Underlying inflation 1.25%.

Governor Lowe’s statement said: “The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets”.

The bank added that its Term Funding Facility had to date seen authorised deposit-taking institutions draw down $83 billion with to a further $104 billion.

The RBA said it will not increase rates again until the cash rate is sustainably within its 2-3% target range, with the Board is not expecting to increase the cash rate for at least three years.

The first bank to respond to the cut was digital lender Athena Home Loans, passing on the 0.15% cut in full.

This rate drop means Athena’s rates are now from 2.19% p.a., P&I, for owner-occupiers and 2.54% p.a for investors.

Athena CEO and co-founder Nathan Walsh said his fintech was to that they cut their rates before customers have to ask.

“With refinancing at the top of Aussie homeowners’ agenda, Athena is encouraging Aussies to not be complacent with their rate and actively look for a better deal,” she said.