News - 4 Aug, 2020

RBA cash rate continues to remain on hold

Scroll Down

At its August board meeting, the Reserve Bank of Australia (RBA) elected to once again hold monetary policy, leaving the cash rate at 0.25%, where it has sat since March.


The decision was largely expected, and the board has stated on numerous occasions it would not be increasing the cash rate until progress is made towards employment and inflation targets.

It has however, not completely ruled out making future changes to its monetary support package and is willing to do so if circumstances permit.

As it stands, the current RBA support package is as follows:

  • Cash rate reduced to 25 basis points.
  • Bond buying program implemented with aim to achieve a 3-year yield target of 25 basis points.
  • Term Funding Facility created to give authorised deposit taking institutions (ADIs) so banks and lenders equity as needed to support customers.

Although satisfied with its current package, during its July meeting the board hypothesised alternative monetary policy changes that could have been taken in March.

“… It would have been possible, for example, to set lower, but still positive, interest rate targets and to have purchased a quantity of government bonds above that necessary to achieve the bond yield target” the July RBA minutes stated.

In the end the board concluded current measures satisfactory but did not rule out future changes.

“After reviewing experience both overseas and in Australia, members agreed that there was no need to adjust the package of measures in Australia in the current environment. Members agreed, however, to continue to assess the evolving situation in Australia and did not rule out adjusting the current package if circumstances warranted.”

Catch up on last month: RBA cash rate holds amid historic economic downturn

What's my borrowing power if I earn $ per year?

Labour market update

During his annual speech to the Anika Foundation on 21 July, RBA Governor Phillip Lowe stated that although we had “turned the corner” in relation to employment, “the path ahead is expected to be bumpy”.

According to ABS Labour Force data, in June employment rose by 210,800 people and the number of hours worked increased by 4%, providing positive signs. However, unemployment saw a rise, increasing from 7.1% to 7.4% – a 21-year high.

You might also like: How will high unemployment impact Australia’s property market?

Construction worker cutting tile

Analysing the data, Dr Lowe believes this pattern is to be expected.

“… many of the people who lost their jobs over recent times have been classified as not in the labour force and so are not counted as unemployed. As the labour market continues to improve, we expect many of these people will start looking for jobs, and thus be classified as re-joining the labour force,” he said.

“This will push up the measured unemployment rate at the same time that the share of the working-age population with a job is also rising.”

Dr Lowe also noted the differences between industries, including which are doing well and which are struggling.

Although some areas have thrived over the past months – such as supermarkets – he said a pick-up was beginning to be seen in other industries such as retail, hospitality and the arts/recreation sectors as restrictions are eased in much of the country.

But not all industries are doing so well. During his speech, Dr Lowe highlighted potential problems for the construction sector and professional services in the coming months, who have not been as affected but could now begin to feel the impacts of the pandemic.

“Through our business liaison we are hearing that many firms, including in the construction sector and in professional services, were able to keep many of their employees over recent months because they had a pipeline of work to complete,” he said.

You might also like: Federal government package offers $25,000 grants to home builders, renovators

What’s happening with debt?

Although government debt is certainly higher than we are used to, Dr Lowe believes it will mean Australia is better off in the long run and will ultimately experience less economic damage.

To date, the Commonwealth has committed almost $150 billion to helping the Australian economy, with the bill coming up to $185 billion when combined with the states’ outlays.

There have also been $26 billion worth of tax cuts and the Treasury is predicting a $184 billion deficit next financial year, after a $86 billion deficit for the financial year just been – a far cry from the $5 billion surplus that had been predicted.

But according to Dr Lowe, history shows the “more protracted” an economic downturn is, the worse it is for economic recovery – suggesting future debt is far better than the alternative of prolonged generational impacts, which would ultimately affect future economic growth.

The below are the impacts which Dr Lowe says the government is trying to reduce:

  • Young people not getting onto the jobs ladder, or slipping off it, with permanent effects on their lives.
  • People losing training opportunities with long-term consequences for career prospects.
  • Lower levels of investment in physical capital and research.
  • Damage to the fabric of our society and to people’s lives that is caused by a long spell of unemployment.
Example Page

At the moment, government spending on JobSeeker and JobKeeper is directly transferring money to Australian households and businesses.

Likewise, government spending on infrastructure and public health is helping the government to create more activities and jobs.

Both these forms of spending are assisting with boosting confidence and encouraging normal patterns of spending and consumption.

When it comes to addressing the debt in the future, Dr Lowe says the best way to address it will be through strong economic growth – which the current measures are attempting to encourage.

“I have spoken on previous occasions about some of the options here and the need for Australia to be a great place for businesses to expand, invest, innovate and hire people. It is important that as a country we focus on this, not only to deal with our current challenges but also our future ones” he said.

You might also like: Australia’s AAA Credit Rating Reaffirmed

Dr Lowe also noted the low level of debt Australia had before the pandemic and the low rates which the government has access to for borrowing, both these things playing in our favour.

“… the Australian government can borrow at the lowest rates since Federation. So the public balance sheet is well placed to smooth out the shock to private incomes and support the economy through the pandemic,” he said.

Click here to read the latest in RBA news.

Words by Kathryn Lee

Sources:

Are you on the lookout to save more on your home loan? Contact eChoice to help you work out your home loan options. With access to 100s of mortgage products from over 25 lenders, eChoice has the resources to get YOU the right home loan deal.

Compare your interest rate today.

Error
Error

You might also like:

Get your tailored home loan report. Start Now