The Reserve Bank has kept its official interest rate at record highs as Australia’s economy continues its slow recovery from the COVID-19 recession
As expected, the RBA has decided to keep its cash rate target at 025%, just hours before the treasurer unveils his long-awaited federal budget
The central bank also kept its three-year government bond yield target at the same level
« A recovery is currently underway across most of Australia, although the second wave of the epidemic in Victoria has resulted in a further contraction in production there, » the RBA governor said, Philip Lowe, in a statement accompanying the rate decision
« The national recovery is likely to be bumpy and uneven and it will take some time before the level of production returns to its level of late 2019 »
He also said the RBA and the government should continue to support the economy « for some time given the economic outlook and the prospect of high unemployment »
RBA governor’s warning comes a week after the government slashed JobKeeper and JobSeeker payments for millions of unemployed workers and Australians
Economists predict that the government will announce a budget deficit of around $ 220 billion for the current fiscal year, or 12% of GDP – which would mark its largest deficit since World War II
But within minutes, the local currency returned to where it was before the RBA decision (719 US cents)
Last month Australia’s unemployment rate fell to 68%, a sharp drop from the 22-year high in July (when it hit 75 percent)
The Reserve Bank is trying to stop the melting of the financial system and tells us to prepare for the impact on the coronavirus fallout, writes Gareth Hutchens
Dr Lowe previously predicted that the unemployment rate could reach 10% by the end of this year but now believes it is « likely to peak at a lower rate than previously expected »
« Even so, unemployment and underemployment are likely to remain high for an extended period, » he said
After the recession of the 1990s, it took a decade for the unemployment rate to return to pre-recession levels
The RBA cut rates to a record low 025% to its reduced emergency rate in March, and it has remained at that level for seven consecutive months
At this meeting, the RBA also launched its first-ever quantitative easing program – buying Australian government bonds to keep yields low, which translates into cheap loans for the country’s banks
The central bank has bought $ 63 billion in government bonds since March, including a $ 2 billion expenditure as recent as last month
He noted that the three-year bond yield had fallen to 018 percent over the past two weeks « as markets forecast some likelihood of further easing of monetary policy »
« Council continues to reflect on how further monetary easing could support employment as the economy opens up further »
The governor also hinted that rates were low and that many incentives would stay « as long as needed » which could last for several years
He added that no hike in interest rates would occur until progress was made towards « full employment » (a 4% unemployment rate of 5 percent), and once inflation is « durably within the target range of 2 to 3 percent »
In fact, the official cash rate is already at 013%, which is lower than the RBA25 percent target of 0
This has fueled speculation that the central bank may cut rates as early as next month
« Despite maintaining October rates, 22% of experts (nine out of 40) predict that a cut could still be considered in November, » said Grahame Cooke, head of analysis at comparison site Finder. p>
Australia just had its worst economic contraction on record, so why are we still talking about a recession and not a depression? Michael Janda explains
He thinks that even if the RBA cuts rates by 015 percentage points (or 15 basis points) next month, which « probably won’t have much of an impact on the Australian economy »
« The cash rate has fallen 125 basis points over the past year and a half – 15 more likely won’t make a big difference beyond making the RBA feel like it’s doing at least something «
Over the past fortnight, some economists predicted that the RBA could have decided to cut rates today as part of a unified « Team Australia » move, adding to the stimulus measures the Morrison government should announce tonight
This would have brought the official cash rate to a new low of 01 percent
But the prevailing opinion was that the RBA would prefer to put the budget at the center of its concerns, delaying any rate cut until next month (at the earliest)
Speculation over the rate cut was fueled by a speech by RBA Vice Governor Guy Debelle on September 22
Dr Debelle said the RBA was evaluating various options such as rate cuts, negative interest rates, intervening in currency markets and buying longer-term government bonds ( with maturities greater than three years)
Westpac economists, followed by AMP Capital, HSBC and UBS, predicted October rate cut as the most likely option
Essentially, the RBA lends banks, collectively, up to $ 200 billion (at the low rate of 025 percent) for three years
The aim of this program is for banks to then loan this money to small and medium-sized businesses struggling under the weight of the pandemic
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AEST = Australian Eastern Standard Time, which is 10 hours ahead of GMT (Greenwich Mean Time)
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World news – UA – RBA keeps rates on hold at 025% ahead of federal budget stimulus
