RBA holds cash rate at 0.25% for May

RBA holds cash rate at 0.25% for May

Photo by Eggzy Pallet on Unsplash

Australias cash rate will remain unchanged again in May, following a hold in April.

The Reserve Bank made the decision in its board meeting today to keep the cash rate at the record low 0.25%. 

The decision comes as no surprise, with each one of the economists surveyed by Bloomberg predicting the cash rate would remain unchanged. 

The central bank itself had also previously essentially ruled out a cut, stating the cash rate had reached its floor and ruled out negative interest rates. 

RBA Governor Philip Lowe said the cash rate would remain unchanged until unemployment substantially fell and inflation remained steady.

"The Board is committed to do what it can to support jobs, incomes and businesses during this difficult period and to make sure that Australia is well placed for the expected recovery," Dr Lowe said.

"The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band." 

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
CelebRate OO P&I ≤60% LVR
2.39% 2.39% $1,558 Go to site
2.74% 2.74% $1,631 Go to site

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 12 August 2020. View disclaimer.

The central bank also reiterated it would continue its quantitative easing program, targeting a yield of 25 basis points on three year Australian Government bonds. 

Dr Lowe said COVID-19 containment measures had reduced infection rates and expected a recovery in the global economy to start later this year. 

In Australia, Dr Lowe said there was considerable uncertainty in the economy's outlook, but expected a recovery in 2021.

"Reflecting this uncertainty, the Board considered a range of scenarios at its meeting," he said.

"In the baseline scenario, output falls by around 10% over the first half of 2020 and by around 6% over the year as a whole.

"This is followed by a bounce-back of 6% next year."

However, Dr Lowe said the unemployment rate would take far longer to recover.

"In the baseline scenario considered by the Board, the unemployment rate peaks at around 10% over coming months and is still above 7% at the end of next year.

"A lower unemployment rate than this is possible if the reduction in labour demand is accompanied by a larger reduction in average hours worked, rather than by people losing their jobs." 

Dr Lowe said the speed of the Australian economy's recovery was highly dependent on the containment of the coronavirus. 

"A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity.

"On the other hand, if the lifting of restrictions is delayed or the restrictions need to be reimposed or household and business confidence remains low, the outcomes would be even more challenging than those in the baseline scenario." 

Sales activity in property market remains weak

CoreLogic Head of Research Tim Lawless said he expected the cash rate to remain unchanged for at least the next couple of years and this translates to extremely low mortgage rates.

"Average variable mortgage rates for owner occupiers are below 3% while investor variable mortgage rates are in the low 3% range," Mr Lawless said. 

"Fixed term mortgage rates are even lower. Such a low cost of debt is a key factor that should help to support housing demand as the economy emerges from the COVID-19 hibernation."

Despite the record low interest rates and massive amounts of financial stimulus, Mr Lawless said housing markets were experiencing a swift reduction in sales activity. 

"CoreLogic estimates for settled sales through April are down by around 40% over the month," he said.

:The sharp fall in sales activity align with weak consumer sentiment readings; with consumers uncertain about their household finances, employment prospects and the short-to-medium expectations of economic conditions, their willingness to make a high commitment decision such as buying or selling a home have been significantly negatively impacted." 


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