RBA Governor explains emergency rate cut and outlines future coronavirus impact

author-avatar By 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. 

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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
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

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

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VariableMore details
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Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

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FixedMore details
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Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

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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 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. Rates correct as of October 27, 2021. 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 which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

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.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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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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