RBA Governor explains emergency rate cut and outlines future coronavirus impact

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on March 19, 2020
RBA Governor explains emergency rate cut and outlines future coronavirus impact

Photo by Weyne Yew on Unsplash

The head of Australia's central bank has given a speech on the motivation behind Thursday's emergency cash rate cut.

Reserve Bank (RBA) Governor Philip Lowe gave an address after cutting Australia's cash rate to a record low 0.25% and commencing the purchase of government bonds.

The central bank also announced $90 billion worth of funding for lenders, with the provision they increase lending to small and medium-sized businesses.

The measures were announced amid an impending potential recession as a result from the economic fallout from COVID-19. 

Dr Lowe said these were unprecedented times but Australia was well positioned to come out the other side. 

"Undeniably, what we are facing today is a very serious situation, but it is something that is temporary," he said.

"As we deal with it as best we can, we also need to look to the other side when things will recover.

"When we do get to that other side, all those fundamentals that have made Australia such a successful and prosperous country will still be there."

Dr Lowe said to get to that other side a bridge was needed: A bridge built by the RBA, the Government, the Treasury, financial regulators and the banks. 

The Governor then went on to explain the other measures the RBA had announced today in detail and how they would assist the economy through this turbulent time. 

Want to earn a fixed interest rate on your cash? The table below features term deposits with some of the highest interest rates on the market for a six-month term.

Lender

At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]5000$product[$field["value"]]$product[$field["value"]]More details

Term Deposit - 6 months

    Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

    Edvest Term Deposit I20 ($1000-$499999) - 6 months

      Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

      Term Deposit I10 ($1000-$499999) - 6 months

        Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]250000$product[$field["value"]]$product[$field["value"]]More details

        Term Deposit ($250k+) - 6 Months

          Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

          Term Deposit (> $1000) - 6 months

            Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]500031$product[$field["value"]]$product[$field["value"]]More details
            FLEXIBLE INTEREST AND REPAYMENT TERMS
            • Interest can be paid to other institution
            • Automatic maturity rollover
            • Early Withdrawal Available
            FLEXIBLE INTEREST AND REPAYMENT TERMS

            Term Deposit (<$1m) - 6 months

            • Interest can be paid to other institution
            • Automatic maturity rollover
            • Early Withdrawal Available
            Annually$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

            Personal Term Deposit - 6 months (Annually)

              Rates based on a $50,000 deposit for 6 months. Rates correct as of August 7, 2022. View disclaimer.

              A reduction in the cash rate

              Over the past year the cash rate has declined by 125 basis points and now sits at 0.25%, where it will stay for some time, according to Dr Lowe.

              "At its meeting yesterday, the Board also agreed that we would not increase the cash rate from its current level until progress was made towards full employment and that we were confident that inflation will be sustainably within the 2–3% range," he said.

              "This means that we are likely to be at this level of interest rates for an extended period." 

              Dr Lowe said the RBA expected unemployment to significantly rise as a result of the coronavirus and the full economic impact was not yet known.

              "But we are expecting a major hit to economic activity and incomes in Australia that will last for a number of months."

              "We are also expecting significant job losses. The scale of these losses will depend on the ability of businesses to keep workers on during this difficult period."

              A target yield on 3-year Australia government bonds 

              With the cash rate almost at its bottom, the RBA was forced to use unconventional policy and purchase government bonds. 

              Dr Lowe said the purchase of 3-year Australian Government Securities would complement the cash rate cuts that have been made.

              "In particular, we are targeting the yield on 3-year Australian Government Securities (AGS) and we have set this target at around 0.25%, the same as the cash rate," he said. 

              "Over recent weeks, the yield on 3-year AGS has averaged 0.45%, so this represents a material reduction."

              Typically, the purchase of government bonds is considered quantitative easing, but Dr Lowe said this was not the case. 

              "Rather than quantities or the size of our balance sheet, our focus is very much on the price of money and credit."

              "Our objective here is to provide support for low funding costs across the entire economy.

              "By lowering this important benchmark interest rate, we will add to the downward pressure on borrowing costs for financial institutions, households and businesses." 

              Lender

              Variable
              More details
              UNLIMITED REDRAWS
              • Fast turnaround times, can meet 30-day settlement
              • For purchase and refinance, min 20% deposit
              • No ongoing or monthly fees, add offset for 0.10%
              UNLIMITED REDRAWS

              Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

              • Fast turnaround times, can meet 30-day settlement
              • For purchase and refinance, min 20% deposit
              • No ongoing or monthly fees, add offset for 0.10%
              Variable
              More details
              100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
              • No upfront or ongoing fees
              • 100% full offset account
              • Extra repayments + redraw services
              100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

              Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

              • No upfront or ongoing fees
              • 100% full offset account
              • Extra repayments + redraw services
              Variable
              More details
              REFINANCE ONLY
              • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
              REFINANCE ONLY

              Variable Rate Home Loan – Refinance Only

              • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
              Variable
              More details
              AN EASY DIGITAL APPLICATION
              • No ongoing fees - None!
              • Unlimited additional repayments
              • Easy online application, find out if you're approved quick!
              • Redraw- Access your additional payments if you need them
              • Use the app to get loan insights to help you pay off your home loan faster
              AN EASY DIGITAL APPLICATION

              Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

              • No ongoing fees - None!
              • Unlimited additional repayments
              • Easy online application, find out if you're approved quick!
              • Redraw- Access your additional payments if you need them
              • Use the app to get loan insights to help you pay off your home loan faster
              Variable
              More details
              • Low rate home loan with added benefits, add offset for 0.10%
              • Save thousands & make an environmentally conscious choice on your loan for homes less than 12 months old
              • Get a 7.0 star NatHERS rating or higher for up to 1.59% discount on your variable rate home loan T&Cs apply

              Green Home Loan (Principal and Interest)

              • Low rate home loan with added benefits, add offset for 0.10%
              • Save thousands & make an environmentally conscious choice on your loan for homes less than 12 months old
              • Get a 7.0 star NatHERS rating or higher for up to 1.59% discount on your variable rate home loan T&Cs apply

              Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of August 7, 2022. View disclaimer.

              Funding for lenders to support small and medium-sized business

              Dr Lowe said this scheme had two objectives: To lower funding costs for the entire banking system and to provide incentives for lenders to support credit to small and medium-sized businesses (SMEs). 

              "Many small businesses are going to find the coming months very difficult as their sales dry up and they support their staff," he said. 

              "Assisting small businesses through this period will help us make that bridge to the other side when the recovery takes place.

              Under this new facility, authorised deposit-taking institutions (ADIs) in total will have access to at least $90 billion in funding.




              Disclaimers

              The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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              author-avatar
              Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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