Vidya Kathirgamalingam - 23 Mar, 2020

RBA makes emergency rate cut in response to coronavirus crisis

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The RBA has announced that it is slashing the cash rate to a record low of 0.25% amidst fears of an impending recession.

The emergency cut comes in the wake of the coronavirus outbreak, which has had financial impacts on employment, businesses and households globally.

RBA Governor Phillip Lowe said in a statement on Thursday that the cut is a part of a “substantial easing of monetary policy which is boosting the cash flow of businesses and the household sector as a whole.”

“We will maintain the current setting of interest rates until a strong recovery is in place and the achievement of our objectives is clearly in sight,” he said in the statement.

The RBA will also be providing $90 billion dollars to support workers and businesses as part of the Australian Government’s $189 billion dollar stimulus package.

“All our actions are geared towards building a bridge, keeping more people in work, enhancing the safety net for those that aren’t and keeping businesses alive,” said Treasurer Josh Frydenberg in a statement  in relation to this stimulus package.

According to the Treasury, the Australian dollar has now fallen 6% since January on a trade-weighted basis and corporate bond spreads have widened globally.

Both large and small businesses are being hit hard by the virus, with many withdrawing their guidance from the ASX and shutting down their businesses.

The closure of these businesses is expected to incite a high number of job losses, with the unemployment rate forecasted to rise to 7% this year as predicted by Westpac.

This factor, in conjunction with the fact that those who rely on shares as a source of income will experience losses, means that there will be more people who are unable to pay their mortgage instalments or rent.

As well as this, a pullback from buyers in the housing market is expected and house prices are predicted to fall by 20%.

It is hoped that the RBA’s approach of adopting a quantitative easing program will help to alleviate the various effects that are being felt within the housing market.  

The program will involve the RBA buying government bonds which will provide them with liquidity.

 The liquid assets can then be lent to banks through the RBA’s  three year funding facility, which will then allow banks to provide cheap loans to it’s customers.

In addition to this, the Australian Banking Association has said that small businesses affected by the coronavirus may be eligible for a 6 month deferral on their loan repayments.

“This assistance package will apply to more than $100 billion of existing small business loans” said Australian Banking Association CEO Anna Bligh in a media release.

According to Bligh, the initiative could “put as much as much as $8 billion back into the pockets of small businesses.”

The big four banks have also announced that homeowners may be able to take a break from mortgage repayments for periods as long as 6 months.

The customers who may be eligible to defer their loan repayments are mainly those who have suffered economic losses or have become unemployed as a result of the coronavirus outbreak. 

Westpac, ANZ, CBA and NAB have all been proactive in responding to the coronavirus situation as they are adjusting  their own standard and fixed variable rates following the RBA’s rate cut.

For instance, CBA announced that it’s 1, 2 and 3 year fixed home loans will see a 70 basis point cut to 2.29% which is coming into effect on March 30th.

Lowe has said that these changes are “likely” to stick around for an “extended period” until progress towards full employment is made and inflation is around the 2-3% mark.

It is hoped that the changes will not only facilitate this progress, but will ensure that the country’s economy is equipped to recover from the ongoing coronavirus health crisis.

Words by Vidya Kathirgamalingam

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