The Reserve Bank of Australia has slashed the official interest rate to a record low of 0.1% and eased other monetary policy to boost the national economy now that Victoria has emerged from its second coronavirus lockdown.
On Tuesday afternoon, the RBA said it will cut the cash rate to 0.1% down from 0.25% and buy $100 billion of government bonds over the next six months, following today’s highly anticipated board meeting.
“The recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago,” said RBA governor Philip Lowe.
“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”
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Other measures resulting from today’s meeting will:
- Lower the three-year yield target on government bonds to about 0.1%, from 0.25%;
- Reduce the interest rate on commercial bank loans to 0.1%, down from 0.25%, through the term funding facility; and
- Cut the interest rate paid on commercial bank deposits in exchange settlement accounts to 0%.
A focus on job creation
In its statement explaining the decision to cut rates, the RBA predicted a persistently high unemployment rate will peak at a little below 8% and contribute to sluggish wage growth over the next several years.
“This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1.5 per cent in 2022,” Lowe said.
In response to less-than-ideal levels of unemployment, the RBA board said today’s measures will “support job creation” and “the recovery of the Australian economy from the pandemic”.
Today’s interest rate cut to 0.1% is a new record low. The rate was sitting at 0.75% in October 2019, before being cut to 0.50% and then slashed again to 0.25% in March 2020 as the economic impacts of the pandemic intensified.
The RBA forecasts monetary and fiscal support will be required for some time, however, the central bank will wait for the labour market to improve and for inflation to comfortably be between 2-3%.
According to the RBA’s analysis, interest rates are not expected to increase for at least three years.