The Reserve Bank of Australia has announced that the official cash rate will remain at the record low .25%. A decision which seems to reflect market consensus on the issue.
We can’t forget the rare out of cycle cash rate reduction in March, brought on by the escalating COVID-19 crisis. The first occasion that a rate cut has been announced outside a regular meeting since 1997, a clear sign of the adverse impacts of the coronavirus. In the current circumstances most experts predict the cash rate will remain at this level for some time.
Many experts suggest that we simply need to look at the impact of negative interest rates in other countries to avoid the same fate. In a statement Governor Philip Lowe said:
The coronavirus remains first and foremost a very major public health issue, but it is also having very significant effects on economies and financial systems around the world. Many countries are expected to experience large economic contractions as a consequence of the public health response. Large increases in unemployment are also expected. Once the virus is contained, a recovery in the global economy is expected, with the recovery supported by both the large fiscal packages and the significant easing in monetary policy that has taken place. .Govenor Lowe
Governor Lowe went on to say there were “some signs that markets are working more effectively than they were a few weeks ago” which “partly reflects the substantial measures undertaken by central banks. The co-ordinated monetary and fiscal response, together with complementary measures taken by Australia’s banks, will soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed.
On a positive note Governor Lowe added: “These various responses are providing considerable support to Australian households and businesses through what is a very difficult period. The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy. The Board was committed to doing what it could to “support jobs, incomes and businesses.
Governor Lowe also indicated that the Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.
Most experts predict that interest rates will remain low for some time and suggest that the RBA is likely to focus on quantitative easing (QE) measures. Put simply QE is a monetary policy in which a central bank purchases longer term securities from the open market in order to increase the money supply and encourage lending and investment.