RBA leaves rates unchanged

The central bank has made it clear that it will not increase the cash rate target until Australia achieves full employment and the desired inflation target.

In the minutes from its monthly board meeting held yesterday (7 April), RBA governor Philip Lowe repeated the board’s stance that the RBA would not increase the cash rate target until it sees progress being made towards full employment and feels confident inflation will be “sustainably within the 2-3 per cent target band”.

“The board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus,” Mr Lowe said.

On 19 March, the central bank pulled its emergency lever and pre-emptively cut the cash rate to the historical low of 0.25 per cent in response to the economic fallout from the coronavirus pandemic.

Prior to yesterday’s RBA meeting and subsequent decision to hold rates, AMP chief economist Shane Oliver had predicted that the central bank would likely consider expanding its term funding facility (TFF) and ramp up its quantitative easing program.

However, the RBA yesterday highlighted that it had already cut the official cash rate to 0.25 per cent and set a target for the three-year bond yield of 0.25 per cent, which would be supported by quantitative easing and the provision of funding to the banks for three years at 0.25 per cent.

Mr Lowe repeated that the central bank had injected substantial liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy.

Given the substantial liquidity that is already in the system and the commencement of the term funding facility, the daily open market operations are likely to be “on a smaller scale in the near term”, Mr Lowe said.

“Operations at longer terms will continue, but the frequency of these operations will be adjusted as necessary according to market conditions.”

Mr Lowe said the first drawings under the TFF were made on Monday, which he suggested would lower funding costs across the banking system and incentivise lenders to support credit to SMEs.

Commenting on the RBA’s latest board meeting, however, Mr Oliver said more action may still be needed.

“This could involve the RBA extending its low-cost funding facility for banks and possibly expanding its bond buying program to the corporate debt market,” he said.

Mr Lowe added that many countries are expected to see significant economic contractions as a result of its response to the coronavirus pandemic, with large increases in unemployment also expected.

However, once the virus is contained, Mr Lowe predicted that there would be a global economic recovery, supported by the significant fiscal packages as well as the easing in monetary policy.

Low rates to support households during COVID-19

Mortgage Choice CEO Susan Mitchell said a cash rate so close to zero was unlikely to have a significant impact on market rates. She added that, while there was not much room for home loan interest rates to fall further, a prolonged period of low interest rates would support households and businesses as they braced for the economic impact of the coronavirus pandemic.

“Home loan interest rates are sitting at record lows, and this is particularly the case with fixed rate home loan interest rates, which are extremely competitive at present,” Ms Mitchell said.

Commenting on the property market outlook, the Mortgage Choice CEO noted that the latest CoreLogic research revealed that dwelling values continued to rise in March, up 0.7 per cent nationally, but noted that it was the lowest monthly gain since the market turned in July last year.

“The outlook for dwelling values is uncertain, and only time will tell how a contraction in economic activity will impact dwelling values, but it’s fair to say that social distancing measures will likely dampen demand in the medium term,” she said.

Finsure managing director John Kolenda also commented on the rate decision, stating that the RBA would now await the impact of the federal government’s support measures (along with an extra $12 billion in stimulus from the states).

Mr Kolenda said home loan customers who are facing financial hardships should contact mortgage brokers to see if they can receive support from lenders, which are offering six-month deferrals on business and home loan repayments.

“Do not leave it too late, as if the situation deteriorates further, banks will become inundated with customer calls relating to hardship,” he said.

Indeed, the RBA governor said the coordinated monetary and fiscal response to the economic fallout from the coronavirus pandemic, together with measures taken by Australian banks, will soften the expected contraction and help ensure the economy is well placed to recover once the pandemic has passed and restrictions are lifted.

“These various responses are providing considerable support to Australian households and businesses through what is a very difficult period,” Mr Lowe said.

“The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy.”

[Related: RBA provides banks with $8.8bn liquidity boost]