RBA Keeps Interest Rate at Historic Low as it Forecasts Economic Bounce-back in 2021
The Reserve Bank of Australia has retained the official interest rate at 0.1 per cent but has flagged the economic road to recovery out of the coronavirus pandemic will be long and bumpy.
In its monthly monetary policy statement, the central bank said it would retain the current cash rate at the historically low level of 10 basis points while the health crisis continued to stifle the global macroeconomic environment.
RBA governor Philip Lowe said positive news of an incoming coronavirus vaccine was boosting sentiment; however, the central bank was not expecting gross domestic product (GDP) to recover until the end of next year.
“The positive news on vaccines has boosted equity markets, lowered risk premiums and supported further increases in some commodity prices,” Dr Lowe said.
“In the RBA’s central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019.”
At its November meeting, the RBA decided it would slash the cash rate by 15 basis points to 0.1 per cent, its lowest point in history, to alleviate the ongoing pressures from the pandemic.
Lowering interest rates assists by lowering financing costs to borrowers in the form of cheaper rates in loans.
Reduced rates forces banks to lower rates across all interest accruing products such as home loans and deposit accounts.
Dr Lowe said heightened monetary and fiscal policy support would be needed for quite some time and no increases to the cash rate would be made until inflation was within the target rate of 2 to 3 per cent.
He also noted unemployment rates were expected to increase. Latest economic data shows unemployment in October was 7 per cent.
“The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years,” Dr Lowe said.
“The board views addressing the high rate of unemployment as an important national priority.”
Economists were not expecting the RBA to change its monetary policy settings.
CommSec chief economist Craig James said Tuesday’s decision was encouraging; however, the RBA was “under no illusion” about the need for ongoing economic assistance.
The RBA said the board was prepared to do more if necessary.
“Future decisions by the Reserve Bank and state, territory and federal governments will depend on: continued success in ‘flattening the curve’, virus treatments and vaccines being rolled out, progress of the job market and progress of consumer confidence and spending,” Mr James said.
ANZ economist David Plank said the rate would likely not change for the next three years.
The RBA also flagged it would continue its unconventional monetary policy measures that included a term funding facility that is providing the banking sector with cheaper liquidity and its three-year bond-buying scheme.
In November, the RBA also announced a further $100 billion quantitative easing program in which the central bank would purchase five to 10-year government bonds over the next six months.
Quantitative easing is a form of monetary policy implemented by central banks when cutting interest rates is no longer effective because the interest rate is either at or approaching zero.
The unconventional policy is designed to promote economic growth by increasing the supply of money within financial markets.