News - 6 Oct, 2020

RBA October Cash Rate Remains on Hold

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The October cash rate will remain on hold at 0.25% following the central bank’s board meeting earlier today. The decision marks the seventh consecutive month the Reserve Bank of Australia (RBA) has left the cash rate unchanged.


The decision was made despite talks of an October rate drop to 0.10%, which spiralled over September but ultimately bottomed out, the attention instead shifting to the prospect of a November cut.

It is thought the RBA wanted to avoid making any policy changes until the government’s federal budget announcement, which is due to be handed down by Treasurer Josh Frydenberg tonight.

While Commonwealth Bank had predicted rates to hold steady, NAB had predicted there would be a rate cut to 0.10% in either October or November – later updating its forecast to say November seemed most likely. Westpac initially predicted October would see a rate drop but in late September updated its forecast to say it would not be until the next board meeting on 3 November.

“October 6 happened to be Budget Day so our expectation was that it would be another ‘Team Australia’ initiative with both the fiscal and monetary authorities working together to address the economic crisis,” Westpac chief economist Bill Evans said in a forecast update on 28 September.

“A central bank moving on Budget Day could be interpreted by the government and the bank itself as diverting attention away from the Budget and complicating the government’s task in ‘selling’ the Budget.”

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Economic impact of COVID-19 in Australia

Despite August unemployment dropping to 6.8%, the RBA says there is still a long way to go before full employment is achieved and inflation targets are met.

“In the August Statement on Monetary Policy, the forecast was for the unemployment rate to rise to 10% at the end of the year and (in the central scenario) to decline gradually to be 7% by the end of 2022,” said RBA Deputy Governor Guy Debelle during a 22 September address to the Australian Industry Group.

“While the recent labour market release indicates outcomes could be better than this, there would still need to be a significant further decline in the unemployment rate before the Australian labour market would be nearing full employment.”

Dr Debelle also noted that even before the pandemic, the 5% unemployment rate was not low enough to generate wage growth consistent with achieving the inflation target.

The RBA continues to maintain that the cash rate will not be raised until progress is made towards full employment and inflation is within the 2-3% target band.

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Banks and lenders slash rates

In bad news for savers, interest rates on savings account have been cut across the board as banks attempt to reduce costs, while those shopping for a mortgage continue to benefit from low rates.

NAB, Commonwealth Bank and ING all made cuts to savings accounts over September.

“Even if it’s just to lift meagre interest rates to mediocre returns, savers today have to manage their money actively or make do with much more modest remuneration than they could be getting,” said Canstar finance expert Steve Mickenbecker.

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Homebuyers, however, are benefiting from the low rate environment, with lenders also taking the axe to home loan interest rates.

In the past month, Commonwealth Bank cut its lowest variable interest rate by 0.10 percentage points to 2.69% p.a. for owner-occupiers and by 0.15 percentage points for investors. ING also lowered its owner-occupier variable interest rate for new customers by 0.10 percentage points to 2.49% p.a.

Other lenders who made cuts to mortgage rates over September include Firstmac, People’s Choice Credit Union and Australian Unity, among others.

Click here to read the latest in RBA news.

Words by Kathryn Lee

Sources:

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