After holding the cash rate steady for two consecutive months, the central bank meets today to discuss the possibility of a change in June.
March was a historic month for the Reserve Bank (RBA), cutting the cash rate twice to take it to a record low 0.25%, and implementing a quantitative easing program for the first time ever.
But since then the central bank has been relatively quiet, supporting the government's stimulus packages through its bond-buying program, believing fiscal policy will better drive economic recovery than monetary policy.
So will the RBA move today to change the cash rate for the third time this year?
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.
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 14 July 2020. View disclaimer.
In short, any change seems unlikely: RBA Governor Phillip Lowe fronted the Senate Select Committee on COVID-19 last week and said the economy was tracking better than previously predicted.
"With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be as severe as earlier thought," Dr Lowe said.
"Much depends on how quickly confidence can be restored."
Despite this, a hike in the cash rate seems extraordinarily unlikely given the most recent unemployment figures from the Australian Bureau of Statistics (ABS).
Unemployment rose to just 6.2% in March from 5.2%, a shock given most economists forecast a rise to around 8.3%.
However, almost 600,000 jobs were lost in the month, the most ever, with JobKeeper disguising the extent of the damage to unemployment.
Dr Lowe has repeatedly stated the cash rate would not be raised until progress towards full employment was reached, which he revised from 4.5% to 5% last week, due to the impact of COVID-19.
"We know from previous sharp economic downturns there will be scarring in the labour market," he said.
"We want to reduce the amount of scarring. I think the estimate of full employment starts rising again to 5%."
NAB economists said monetary policy was needed to support fiscal policy, but this wouldn't come in the form of a cash rate change, with Westpac and CommBank economists in agreement
"The cash rate is also unlikely to see further reductions with negative rates ruled out by Governor Lowe and the RBA focus now firmly on end-user rates via the yield curve target, as well as ensuring sufficient liquidity in bond markets and the free flow of credit to households and business," NAB said.
But could we see a cash rate cut?
Again, it is very unlikely we will see a cash rate cut, as Dr Lowe has repeatedly stated the cash rate is at its floor at 0.25% and the RBA did not have an appetite for negative interest rates.
"I think negative interest rates are extraordinarily unlikely," Dr Lowe told the Senate Committee last week.
"I don't think negative interest rates work. The package we have so far is working. If we had to do more we could buy more government bonds."
However, due to the RBA's bond-buying program, the actual cash rate is around 0.12%, despite the official rate sitting at 0.25%.
And in recent weeks there have been increasingly louder calls to take the cash rate negative.
Westpac economist Bill Evans said negative rates would help lenders cut their home loan rates and help the economy by enabling businesses and mortgage holders to borrow at extremely low cost.
"A serious case can be made for the RBA to consider further cuts and entering negative territory for the cash rate if it becomes apparent that the economy is deteriorating even more than is currently expected," Mr Evans said.
"A small open economy with significant foreign liabilities would certainly see a substantial improvement in the competitiveness of the currency with further rate cuts when other major markets are anchored at their effective lower bounds."
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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