The official cash rate has dropped 15 basis points to 0.10% following the Reserve Bank of Australia (RBA) board meeting earlier today. It is the lowest the cash rate has fallen since its last historic cut to 25 basis points in March.
The decision follows two months of speculation. While many economists had initially earmarked October as the most likely time for a drop, the majority later revised estimates to indicate the RBA would drop rates in November.
Westpac, NAB and Commbank all predicted today’s November monetary policy decision.
Recession likely over but unemployment still on radar
Australia’s first recession in almost 30 years could be over, according to estimates from the RBA. During the Senate estimates hearing last week RBA Deputy Governor Guy Debelle revealed it was likely the Australian economy experienced positive growth during the September quarter.
“Our best guess is it looks like the September quarter for the country recorded positive growth rather than slightly negative,” Dr Debelle told the Committee.
“As best as we can tell, the growth elsewhere in the country was more than the drag from Victoria, and possibly the drag from Victoria was a little less than what we guessed back in August.”
In Australia, a technical recession is defined as two consecutive quarters of economic contraction. September economic figures from the Australian Bureau of Statistics (ABS) revealed Australian Gross Domestic Product (GDP) fell 7.0% in the June quarter and 0.3% in the March quarter, meeting the definition and putting Australia in its first recession since 1990-91. The June fall was the largest quarterly contraction since records began in 1959.
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— Scott Morrison (@ScottMorrisonMP) October 17, 2020
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Despite anticipation of growth, the RBA warns recovery still has a long way to go. During a recent speech, RBA Assistant Governor Michele Bullock highlighted that business failures are still likely to increase given many firms are being supported by government subsidies, loan repayment deferrals and temporary insolvency relief.
“Business failures will increase even as the economy starts to recover,” she said.
“Business failures are currently much lower than usual … But this can’t last, and we expect to see failures rise. Survey evidence suggests that around a quarter of small businesses that are currently receiving income support would close if support were removed now and trading conditions had not improved.”
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PwC chief economist Jeremy Thorpe told The Australian he believed despite positive economic growth, it is important for governments and businesses to continue to focus on employment.
“Just because we are no longer in a technical recession does not mean that we can declare economic victory,” he said.
“Governments and businesses will need a persistent focus on growing employment and stimulating economic growth.”
Over September the unemployment rate rose 0.1pts to 6.9%, according to ABS Labour Force data.
The 11,300 people increase to national unemployment figures followed the surprising gain to employment figures over August, where the unemployment rate dropped 0.7pts from 7.5% in July to 6.8% in August. The unemployment rate is currently 1.7pts higher than a year ago.
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How long will low interest rates last?
In good news for those who are paying off a mortgage or about to enter the property game, low-interest rates are expected to stay for some time yet.
The RBA has continually maintained it has no intention of increasing the cash rate until progress is made towards full employment and inflation falls within the 2-3% target band. This is estimated to be at least three years away.
“While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market,” said RBA Governor Philip Lowe during a 15 October speech.
“On our current outlook for the economy … this is still some years away. So we do not expect to be increasing the cash rate for at least three years.”
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How will banks and lenders react?
RateCity research director Sally Tindall believes banks and lenders will feel pressured to pass the cut on to mortgage rates, and particularly to existing home loan customers.
“Lenders have been aggressively cutting variable rates over the last six months, but by and large these cuts have been reserved for new customers, or people willing to fix their rate,” she said.
“There are thousands of existing mortgage holders out there who aren’t in a financial position to switch banks. Any rate relief needs to be filtered down to them.”
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Click here to read the latest in RBA news.
Words by Kathryn Lee
Sources:
- RBA Senate estimates hearing 27 October 2020
- RBA Speech Financial Stability in Uncertain Times 27 October 2020
- ABS Economic activity fell 7.0 per cent in June quarter
- PwC chief economist Jeremy Thorpe as quoted by The Australian
- ABS Labour Force, Australia September 2020
- RBA Speech The Recovery from a Very Uneven Recession 15 October 2020
- Westpac RBA prediction
- NAB RBA prediction
- Commbank RBA prediction
- Ratecity Sarah Tindall
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