The Reserve Bank of Australia (RBA) has cut the official interest rate to 0.10 per cent, in its first major move since the country entered recession.
The widely predicted rate cut comes after the RBA slashed rates to 0.25 per cent in a rare out-of-cycle rate cut in March.
The Reserve Bank will also purchase $100 billion of five to 10 year Government bonds over the next six months, Reserve Bank Governor Dr Philip Lowe said in his statement.
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Lowe said.
And while recent economic data is “a bit better than expected”, he forecast a bumpy road ahead.
The central bank had previously flagged it would not take interest rates lower than 0.25 per cent, with today’s decision signalling a significant change of heart.
It’s the first rate change since Australia’s economic growth indicator, or GDP, fell 7.6 per cent in the June quarter, marking Australia entering recession territory for the first time in nearly 30 years.
The Reserve Bank has in recent months largely left economic recovery to Government measures, instead choosing to lean on its other lever: quantitative easing.
Since April, it’s been buying up Government bonds or, as it’s referred to colloquially, “printing money”.
At the same time, it’s been monitoring the reception of the Government’s JobKeeper and JobSeeker stimulus measures.
Australian taxpayers have pocketed a significant amount of those stimulus payments, with the amount of disposable income Australian households are saving increasing from 6.0 per cent to 19.8 per cent. That’s partly due to Australia’s shops and restaurants being shuttered for several months, and also due to a general sag in consumer confidence.
Now, those two measures are beginning to wind down while the mortgage deferrals scheme has also come to end for most, even as unemployment remains stubbornly high at 6.9 per cent.
Earlier in October, Lowe said future rate cuts would likely gain more traction as the economy reopens, suggesting that increased spending could ease some of Australia’s unemployment woes.
CLSA Premium’s Peter Boehm said Tuesday’s cut was almost inevitable and that the RBA would have cut in October were it not for the Federal Budget falling on the same date.
“Whether this is a good idea or not only time will tell, but I am troubled by the drag Victoria has on overall economic recovery and the national impact of the reduction in JobKeeper,” Boehm said.
“A further rate reduction may not have the desired impact, and leave nothing in the tank if the economy doesn't show sustained signs of positive movement. And we don't want a situation of negative interest rates."
Pressure on banks to pass on the interest rate cut
If Australia’s banks passed along the full 0.15 per cent cut, the average variable home loan interest rate would fall to 3.19 per cent from 3.34 per cent.
However, it’s unlikely the banks will pass along the full cut. Mozo analysis found that while 69 lenders passed on the full savings in the first rate cut of March, only three passed on some of the cut in the second cut of March.
“With so many mortgage customers under pressure, if we see another cut to official interest rates tomorrow we need the banks to end their longstanding practice of profiteering at their customers’ expense,” Mozo director Kirsty Lamont said.
Westpac on Monday announced that it had made a profit of $2.608 billion and would pay a final dividend of 31c.
Mozo analysis found that all four big banks delayed passing on the March rate cut and as a result collectively banked $109 million.
“With the progressive winding back of Jobkeeper and Jobseeker support payments and the banks mortgage holidays coming to an end, it’s critical the banks pass on this latest cut without delay.”
The average homeowner would save $33 a month if their lender passed on the full 15 basis point cut, she added.
“With a number of the banks already indicating some customers won’t make it through the pandemic, their decision on whether or not to pass the rate cut could quite literally be the difference between keeping a roof over your head or being kicked out in the cold,” Lamont said.
Good news for property, bad news for savers
Housing market monitor CoreLogic said the rate cut would likely serve to boost the property sector.
“Record low mortgage rates are a key factor supporting housing market activity. Historically, reductions in interest rates have provided a positive flow-through to housing demand,” it said in its monthly house price index.
“If mortgage rates move to new record lows, we expect this will further incentivise home purchasing activity.”
However, today’s decision puts Australia’s pensioners and those relying on their savings in a worse position.
Australia’s lenders have been progressively slashing rates, with Canstar analysis finding as many as 50 have shaved off interest since September, even without the RBA moving.
“The trend of rate cuts for savers is likely to continue, not to the already near zero percent base rates but to bonus rates and introductory rates. No bank is keen to put a zero or negative savings rate into the market,” Canstar executive Steve Mickenbecker said.
“Savers have been doing it tough and will continue to do so, as the Reserve Bank Governor has indicated the cash rate will stay low for years to come.”
The average at-call savings interest rate is now just 0.57 per cent, while the highest 6-month term deposit rate is 1.20 per cent.
That means someone investing $10,000 for six months will make $60 in interest. However, that’s still higher than the $18 made on the average big bank’s 0.36 per cent rate.
Bumpy road ahead: Lowe
Lowe said that while the global economy has been recovering, most countries have not yet recovered entirely and there are significant challenges for Europe.
“In Australia, the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria. It will, however, take some time to reach the pre-pandemic level of output,” he continued.
Under the RBA’s central scenario, GDP growth will hit 6 per cent over the year to June 2021 and 4 per cent in 2022.
He also forecast unemployment will stay high, peaking just below 8 per cent. This reflects a slight improvement in previous forecasts, which pinned the peak at 10 per cent.
“The Board views addressing the high rate of unemployment as an important national priority. Today's policy package, together with the earlier measures by the RBA, will help in this effort,” Lowe said.
The unemployment problem also poses headwinds for wage growth and inflation, with Lowe predicting inflation will be 1 per cent in 2021 and 1.5 per cent in 2022.
“The combination of the RBA's bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets,” he said.
“The Board is prepared to do more if necessary.”
The RBA Governor will speak at 4pm AEDT on Tuesday.
More to come.
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.