The Reserve Bank of Australia (RBA) has left the official cash rate on hold at 0.25 per cent as the nation’s economy continues to feel the fallout of COVID-19.
Noting the economy is grappling with the “biggest contraction since the 1930s” RBA Governor Philip Lowe said his board was committed to doing what it could to support jobs, incomes and businesses in Australia.
“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now under way in most of Australia,” Dr Lowe said.
“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”
Dr Lowe said employment had increased in June and July, although unemployment and underemployment remain high.
“The virus outbreak in Victoria and subdued growth in aggregate demand more broadly mean that it is likely to be some months before a meaningful recovery in the labour market is under way,” he explained.
“In the Bank’s central scenario, the unemployment rate rises to around 10 per cent later in 2020 and then declines gradually to be to still around 7 per cent in two years’ time.
“Wage and prices pressures remain subdued and this is likely to continue for some time. Inflation is expected to average between 1 and 1½ per cent over the next couple of years.
“The economy is being supported by the substantial, coordinated and unprecedented policy easing over the past six months. Fiscal policy is playing an important role.
“Public sector balance sheets in Australia are in good shape, which allows for continued support. Indeed, fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.
“In addition, support for the recovery is being provided by Australia’s financial institutions, which also have strong balance sheets and access to high levels of liquidity.
“The Board is committed to do what it can to support jobs, incomes and businesses in Australia.
“Its actions, including today’s extension of the Term Funding Facility, are keeping funding costs low and assisting with the supply of credit to households and businesses.
“The Board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery.
“It 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.”
Rate hold expected: MortgageChoice
Speaking about the RBA’s decision, Mortgage Choice CEO Susan Mitchell said the decision was expected given the latest economic data and uncertainty over Australia’s economic recovery.”
“High unemployment and persistently low inflation sitting well below the Board’s target range will keep the cash rate stagnant for the foreseeable future,” Ms Mitchell said.
“In a speech delivered by RBA Governor Lowe to the House of Representatives Standing Committee on Economics, Dr Lowe reiterated that the cash rate will remain at the current level for some years and highlighted the important role fiscal policy is playing in supporting the Australian economy.
“The latest data from the Australian Bureau of Statistics reveals the devastating impact the Coronavirus pandemic continues to have on the labour market.
“The number of unemployed Australians grew over the month of July, bringing the seasonally adjusted unemployment rate to 7.5 per cent. Given the data was recorded prior to Melbourne moving to Stage 4 restrictions in August and fiscal support to JobKeeper is set to reduce in September, high unemployment is likely to persist for some time yet.”
Ms Mitchell notes uncertainty over the economic outlook continued to weigh on consumer sentiment.
“The latest Westpac Melbourne Institute of Consumer Sentiment revealed that sentiment fell further in August to near the extreme low seen in April, in response to the Stage 4 lockdown in Melbourne and new cases in New South Wales,” she said
“The latest economic data creates many headwinds for the nation’s property market.
“Data from CoreLogic revealed that Australian housing values recorded a fourth month of decline, down 0.4 per cent in August.
“Regional markets have proven more resilient, bucking the trend with dwelling values remaining flat over the month. Pleasingly, the rate of decline has eased over the past two months with five of the eight capitals recording steady or rising values throughout the month.”
“As we enter what will be an unusual Spring selling season, opportunities remain for first home buyers who are ready to put their foot on the property ladder.
“The low cash rate continues to drive historically low home loan interest rates. This coupled with unprecedented levels of Government support in the form of grants and incentives creates opportunity for prospective buyers.
“I would encourage Australians looking to buy their first home to speak to their local mortgage broker to understand how they can access the support available and to put their best foot forward when applying for a home loan,” Ms Mitchell concluded.
