Australia's central bank today announced it would use the full extent of its monetary policy powers to stem the economic fallout from COVID-19.
It's the first time ever the RBA has cut rates twice in a month or implemented quantitative easing, after the Board scheduled an emergency board meeting on Monday, with an impending recession potentially looming.
The coronavirus has battered the Australian economy, with the government attempting to stop the spread of the virus by banning overseas travel and gatherings of over 100 people, decimating tourism and retail sectors.
In a statement, RBA Governor Philip Lowe announced a target for the yield on 3-year Australian Government bonds of around 0.25%.
"This will be achieved through purchases of Government bonds in the secondary market," Dr Lowe said.
"Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations.
Dr Lowe said the RBA's main goal was to support the Australian economy through these unprecedented times.
"The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus," he said.
"At some point, the virus will be contained and the Australian economy will recover.
"In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly."
The RBA also announced it would provide lenders with funding of at least $90 billion if they increase funding to small and medium-sized business, in an effort to keep this sector afloat throughout the pandemic.
See if your lender is passing in this emergency cut here.
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.
*Rates correct as at 01 June 2020. Rates based on a $50,000 deposit for 6 months.
What is quantitative easing?
Quantitative easing, also known as QE, is the process by which the RBA uses its cash reserves (aka printing money) to buy government bonds.
In some cases, the RBA can also buy private bonds, but has elected to not do so in the announced program.
The best way to think about QE is the RBA spends huge quantities of cash it has created to ease monetary policy.
But we'll get into the nitty gritty to really understand the concept.
Firstly, a government bond is a relatively low-risk investment product which essentially involves investors lending money to the government for a set period of time, at a predetermined rate of return, which is referred to as the yield or a bond's interest rate.
They're considered quite low risk, as it's considered highly unlikely the government will go broke and fail to repay this debt.
So with the RBA set to buy billions of dollars worth of government bonds, the government is given a lot more cash to spend and this extra money is flushed through the economy.
The RBA's purchase also raises the price of bonds and lowers bond yields, which in turn, lowers funding costs for lenders, allowing them to cut the interest rates on home loans and business loans.
Coupled with low-interest rates, banks are better off lending money than holding onto it.
So we arrive back at the beginning: the RBA spends huge quantities of cash it has created, to ease monetary policy.
Essentially, QE should have the same effect on rates as a rate cut would, but the RBA was all out of rope on rate cuts and had to turn to QE.
Thinking about refinancing to a low-rate, variable owner-occupier home loan? The table below displays some of the lowest-rate variable home loans currently on the market for owner occupiers:
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 01 June 2020. View disclaimer.
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 2019. They are (in descending order): Credit Union Australia, 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 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
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 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.
*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.
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