Reserve Bank cuts rates to 0.1%, pledges to buy $100bn of government debt (2023)

The Reserve Bank has cut interest rates to a record low of 0.1% as its governor confirmed Australia is not out of recession.

key point:

  • The official cash rate is expected to remain at 0.1% until 2024
  • Reserve Bank Governor Philip Lowe said unemployment could peak at 8% and fall to 6% by the end of 2022.
  • Dr Lowe said it was highly unlikely that the cash rate would drop below zero because it would do nothing to stimulate spending.

The rate cut to 0.1% is down from a record low of 0.25% announced earlier this year and is not expected to increase for at least three years.

The Reserve Bank of Australia cut its three-year bond rate target to 0.1% as the official cash rate fell. The new minimum rate will also apply to the bank's term funding facility.

The central bank confirmed it would buy $100 billion worth of Australian government bonds over the next six months to boost inflation and encourage lending and investment, a move known as quantitative easing.

Reserve Bank governor Philip Lowe stressed the bank was not printing free money for state and federal governments and that bonds purchased by the Reserve Bank of Australia had to be repaid by the government when they matured.

"They have to be repaid in exactly the same way that the bond is in someone else's hands," he said.

Bond purchases will be purchased in the secondary market and split, with 80% federal government bonds and 20% state government bonds.

The bank has spent more than $60 billion buying three-year government bonds since March.

Other items in today's package include:

  • Lowered the three-year Australian government bond yield target to around 0.1%.
  • Settlement balance interest rate to zero

Dr Lowe said the measures would help tackle high unemployment.,He described it as a "major national priority".

The combination of the RBA's bond purchases and lower interest rates is expected to help the country's economic recovery by reducing funding costs for borrowers, driving a lower exchange rate and supporting asset prices and the balance of payments.

Dr Lowe said the bank was "committed to doing everything we can to support job creation."

"It is encouraging that recent economic data has been slightly better than expected and the near-term outlook is better than three months ago," he said.

"Nevertheless, the recovery is expected to be bumpy and lengthy, with the outlook still hinged on the success of containing the virus."

Dr Lowe said the RBA would buy bonds "in whatever amount is needed to achieve the three-year yield target".

Sarah Hunter, chief economist at BIS Oxford Economics, said the RBA's decision to cut the cash rate was in line with expectations.

Dr Hunt said the bank noted it did not expect to raise the cash rate for the next three years, which would "provide households and businesses with some certainty about their personal loan rates in the short term".

“Accommodative policy implemented so far has had a significant impact on the housing market; house prices are currently trending upwards across the country and lending data suggest this will continue in the short term,” Dr Hunt said.

Lowe says further fall in cash rate 'highly unlikely'

Dr Lowe said Australia was not out of recession despite some media reports, and said the Reserve Bank had more monetary "firepower" to use if necessary.

But he said cutting the cash rate below zero was "highly unlikely".

"While negative interest rates may cause the Australian dollar to weaken, it may affect the supply of credit to the economy and cause some people to save more, rather than spend more," he said.

"We've done everything we can on rates and the focus now is really on quantifying asset purchases."

Dr Lowe said Tuesday's announcement was not made before the pandemic, as monetary easing was likely to gain more traction today than "when there were widespread restrictions".

"In the first few months, the usual transmission mechanisms were not functioning properly, and the challenges facing the country could be better addressed through other policy instruments.

"However, as restrictions are eased and people have more opportunities to spend, our judgment is that further monetary easing is now providing additional support to other policies, including fiscal measures and the RBA's previous monetary policy programme." .

Dr Lowe also said it was highly unlikely the cash rate would drop below zero.

Unemployment rate expected to peak at 8%

Dr Lowe said Australia was still on track to post positive GDP growth in the September quarter despite restrictions imposed in Victoria state.

"In the baseline scenario, GDP growth is projected to be 6 percent in the year to June 2021 and 4 percent in 2022," it said.

The unemployment rate was officially estimated at 6.9% last month, with 937,400 people out of work.

But the pandemic and various government support measures mean that figure undercounts the unemployment crisis, with more than 1.5 million people receiving JobSeeker benefits.

Reserve Bank cuts rates to 0.1%, pledges to buy $100bn of government debt (1)

Dr Lowe said the country's unemployment rate was likely to remain high, but would peak at just under 8 per cent, rather than the 10 per cent previously expected.

It is expected to drop to 6% by the end of 2022, he said.

Dr Lowe said the period of high unemployment would lead to low wages and price growth for years to come.

Inflation is projected at 1% and 1.5% in 2021 and 2022, respectively.

Dr Lowe warned that the cash rate would not rise "until real inflation remains within the 2% to 3% target range on a sustained basis", which would require wage increases and "significant job growth".

Homeowners desperate for banks to pass on rate cuts

Reserve Bank cuts rates to 0.1%, pledges to buy $100bn of government debt (2)

Adelaide homeowners Mark and Verity Riessen are anxiously awaiting how much rate cuts their lender will pass on to them.

"Our lenders didn't pass on the last rate cut from the RBA to us," Reissen said.

The couple bought their home in 2006.

After two refinances and three kids, they have 25 years left on their mortgage, which they are currently paying off with a 3.2% variable home loan.

If their lender doesn't meet the requirements, Riessens is preparing to look elsewhere.

"I would consider negotiating a lower rate or finding another lender," Leeson said.

"Our current lender is offering new loans at 0.7% less than what we're currently paying, so if we're loyal customers, I expect our lender to take care of existing customers as much as we do looking for new ones."

Since the COVID-19 pandemic, households have seen less income and more spending.

The switch to home learning earlier this year meant the family needed to spend more money on technology for their three children.

"We have to spend more money on things like iPads so our kids don't miss out."

Ms Riessen said even a minimal 15 basis point cut from usual would help if the RBA passed it on to them in its entirety.

"Those small amounts of money that might be available through lower interest rates can actually make a big difference."

Savings accounts take another hit

Financial professional Ankita Gangaramani is struggling to save thousands of dollars to cover the application fees and legal fees she needs to become a permanent resident of Australia.

But as officials cut rates again, you might get some bad news from the bankshow much interest you can earn on the money in your account.

After managing to repay the $40,000 loan she took to earn her MBA, Ms Gangaramani is now focusing on accumulating savings while working in the financial sector.

"Amassing savings is a time-consuming process," he said.

Reserve Bank cuts rates to 0.1%, pledges to buy $100bn of government debt (3)

"It will be a while before I get the amount needed for permanent residence."

Ms Gangaramani's application for permanent residence will cost approximately $6,000 in administrative and legal fees.

He has a savings account with one of the big four banks, but his interest rate has steadily dropped with each rate cut by the RBA.

"Previously, it used to be a percentage, one percent of my gross income, but now it's down significantly," he told ABC News.

The interest rate on your savings account is now 0.05%.

"It really hit me in terms of the interest I was earning on my actual savings, so my money wasn't really growing."

You're worried that today's RBA rate cut will mean your rates will go further down to zero.

"Every dollar counts, and if interest rates fall further, that would be a sub-optimal scenario for me."

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