The Reserve Bank of Australia (RBA) has decided to hold the official cash rate of 0.10%, aiming to keep it unchanged for the next three years.
The record-low cash rate aims to boost the economy by encouraging households to spend and businesses to borrow and invest.
Addressing the Committee for Economic Development Australia’s (CEDA) annual dinner, RBA governor Philip Lowe applauded the performance of the Australian economy through the COVID-19 crisis.
“Our economy has performed better than many others in challenging circumstances,” he said.
Catch up on last month: RBA November Cash Rate Drops to New Low 0.10%
Current RBA plan for economic recovery
Dr Lowe also outlined the RBA’s steps toward economic recovery.
“The key here is to ensure a strongly growing economy, so we need to focus on the reforms and innovations that will deliver this,” he said.
These steps include:
- Cutting the cash rate target to 0.1% – encouraging borrowing, investing and household spending.
- Reducing the interest rate on new drawings under the Term Fund Facility to 0.1% – encouraging authorised deposit-taking institutions to lend to big and small business. ADI’s can gain access to funds under the low rate, in addition to extra incentives to lend to small and large businesses.
- Developing a $100b Government Bond Purchasing program – aka quantitative easing.
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What is quantitative easing, and is it helping the economy?
The RBA’s number one weapon to manage the economy is via interest rates. Cuts (to get it growing faster, and which are a form of “easing”) or increases (to stop inflation getting out of hand) are what most people know as monetary policy.
The most complicated of the RBA’s monetary policies, quantitative easing aims to lower the whole structure of interest rates, reducing rates, increasing money supply, and making it more affordable for businesses, governments and households to invest and borrow.
The RBA will purchase government bonds from the secondary market, selling them on to institutional investors who are guaranteed regular interest payments and a future repayment of the principal amount.
Speaking with the ABC senior strategist at Westpac Sean Callow likened quantitative easing to printing money that the RBA can use to buy government bonds.
“The basic mechanics of it is the RBA says, ‘we’ll buy that bond from you. And here you are, we’ve just nudged up your account by the value of that bond – $100 million or whatever’. Now, that money is just created,” he said.
RBA Minutes; no surprises; clear themes. The RBA has clearly signalled the overriding importance of the labour market and the evolution of the pandemic to policy outcomes. By @Westpac Chief Economist Bill Evans. https://t.co/YjBtCLYm6y— Westpac Economics (@WestpacMacro) November 17, 2020
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Current employment stats and the necessity of JobKeeper
Recently released research from the RBA emphasised JobKeeper’s role in Australia’s economic recovery, revealing that the scheme saved 700,000 jobs during its first four months.
Commenting on the news, Australian Treasurer Josh Frydenberg said, “with 650,000 jobs created over the past five months, 80% of those Australians who either lost their jobs or saw their working hours reduced to zero at the start of the pandemic are now back at work”.
“This has seen the effective unemployment rate come down from around 15% in April to 7.4% today,” he said.
However, in a speech to the Australian Business Economist, the deputy governor to the RBA Guy Debelle warned of removing supports like JobKeeper too soon.
“A number of European countries learned this lesson to their cost after the global financial crisis,” he said.
How can you help the economy?
Speaking at the Committee for Economic Development of Australia’s annual dinner, RBA governor Philip Lowe said that Australia’s economic recovery is also dependent on the general public.
He acknowledged the uncertainty of the financial market whilst handing down some advice to the Australian people:
- A certain degree of risk is needed for Australia’s economic recovery.
- Accelerated borrowing and investing will speed up the recovery process.
- Take advantage of business opportunities to grow and increase Australia’s productivity.
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How has home buying and selling been affected?
The property market responded positively to the rate cut in March, and November’s month’s cut to 0.10% is forecast to have the same effect.
The Big Four banks welcomed the rate cut with open arms, all passing them down to their customers in some capacity.
ANZ Group Executive, Australia Retail & Commercial, Mark Hand said that ANZ aimed to help customers, the economy and the housing market by passing on rate cuts.
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“We have once again weighed up a number of factors in making this decision with our focus today on supporting business recovery while continuing to offer very competitive home loan rates to help our customers and the housing sector,” he said.
Click here to read the latest in RBA news.
Words by Nell Matzen
- COVID, our changing economy and monetary policy
- Statement by Philip Lowe, Governor: Monetary policy decision
- The RBA has begun ‘quantitative easing’. What is it? And how does it work?
- How many jobs did JobKeeper keep?
- Coronavirus Australia news: RBA estimates JobKeeper saved 700,000 jobs during COVID-19 recession
- RBA warns government: ‘Be careful of removing stimulus too early’
- RBA governor says economic recovery needs risk-takers
- How did ANZ, CBA, NAB & Westpac respond to the November RBA rate cut?
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