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Interest rates in Australia have been slashed one final time to 0.25%, a historic rock bottom for ‘unprecedented times’

Interest rates in Australia have been slashed one final time to 0.25%, a historic rock bottom for ‘unprecedented times’

  • The RBA has announced an emergency stimulus package on Thursday, cutting the official interest rate out of cycle to 0.25%.
  • It’s the second cut in just three weeks as the RBA seeks to contain the coronavirus fallout to the economy.
  • It came as one part of a four part package, with the RBA also unveiling quantitative easing for the first time in Australia.

Australia entered a brave new world on Thursday as the Reserve Bank of Australia (RBA) cut the official interest rate to 0.25%, a new historic low.

Announcing an unscheduled Board meeting on Monday, speculation was rife the RBA would cut rates out-of-cycle for the first time in recent memory as it works to contain the economic implications of the unprecedented coronavirus crisis — and that’s exactly what it did.

“The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system,” RBA Governor Phillip Lowe said in a statement on Thursday.

“At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.”

In announcing the rate cut to 0.25% from 0.5%, Lowe assured Australians it would not rise again “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

It comes after similar emergency measures were enacted overseas in the United States and New Zealand earlier this week, but is too little too late in Australia to have a meaningful economic impact, according to Indeed Asia-Pacific economist Callam Pickering.

“Today’s emergency rate cut will do little to protect the economy from COVID-19. It might help at the margin but traditional monetary policy is a blunt instrument and not terribly useful in the middle of a crisis, particularly with the rate already so low,” Pickering said. “Traditional monetary policy is best used as a preventative measure.”

There was perhaps little else the RBA could do, however, given the impact’s scale.

“The RBA can only do so much in the face of virtual self-inflected depression conditions developing around the world,” Betashares chief economist David Bassanese told Business Insider Australia. “We are living in unprecedented times given we are effectively destroying our own economy to take pressure off the health system assuming COVID-19 cases spike. The cost in lost jobs, wealth and other forms of related ill-health will now also be immense.”

It’s likely to also be the last cut Australia sees, with the RBA now looking to the rest of its toolkit to make it happen, announcing it as part of a broader four-part package. Lowe also unveiled another first for the country: a quantitative easing (QE) program.

Under the program, the RBA will buy and sell three-year government bonds to expand the nation’s money supply in something of a last-ditch effort to stimulate a groaning economy.

“These purchases will commence tomorrow,” Lowe said, noting more details were forthcoming.

The third part of the package is a new funding facility for Australian banks which will extend more than $90 billion to lend out to businesses struggling in the current economic climate.

“Financial market volatility has been very high. Equity prices have experienced large declines. Government bond yields have declined to historic lows,” Lowe said. “However, the functioning of major government bond markets has been impaired, which has disrupted other markets given their important role as a financial benchmark. Funding markets are open to only the highest-quality borrowers.”

Pickering said it will be this measure may be the most significant of all Thursday’s announcements.

“The Reserve Bank will continue to keep financial markets liquid and that will be incredibly important,” he said. “We saw during the GFC how devastating it can be when funds stop moving. Banks will play an important role in supporting the liquidity of households and businesses impacted by the crisis.”

The fourth and final part of the package will be aimed at easing banking costs associated with maintaining large settlement balances, as part of the new measures.

While the Federal Government last week announced a $17.4 billion stimulus package, economists expect it will be insufficient to avert an approaching Australian recession.

The RBA now hopes this latest batch of measures helps bolster the stimulus effort and protect the economy from the very worst.

“Together, these measures will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery,” Lowe said.

Source: BusinessInsider

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