RBA takes emergency action, cuts interest rates to 0.25%
Thursday 19 March 2020
The Reserve Bank made the extraordinary decision to cut interest rates ahead of schedule today, as the coronavirus outbreak threatens to derail economic activity across Australia.
The official cash rate now sits at an historic low of 0.25%.
In a statement issued today, RBA Governor Philip Lowe said the move will help the economy regain its footing amid widespread disruption.
"The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus,” he said.
"At some point, the virus will be contained and the Australian economy will recover.”
“In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly."
The dramatic move mirrors decisions being made by central banks around the world.
Earlier this week, the US Federal Reserve cut interest rates by a full percentage point and announced it will be recommencing the quantitative easing program it first launched during the GFC.
Closer to home, the Reserve Bank of New Zealand made headlines after slashing its own official cash rate from 1.00% to 0.25%, pledging to keep it at that mark for at least 12 months.
According to Mozo’s Banking Expert Peter Marshall, the RBA faces immense pressure to move in line with its global counterparts.
“The Board understands that any tools they have available need to be applied if they don’t want to see the Australian dollar drop through the floor,” he said.
The RBA typically makes monetary policy decisions on the first Tuesday of every month. This month's inter-meeting decision is a break from tradition we didn’t see even during the GFC.
RBA moves ahead with Quantitative Easing
The Board also detailed plans to introduce a bond purchasing program to protect against further economic fallout, something it had telegraphed in a statement on Monday.
It will be specifically targeting the yield on three-year Australian Government Securities (AGS), hoping to bring it down from its current perch of around 0.45% to 0.25%.
“We have chosen the three-year horizon as it influences funding rates across much of the Australian economy and is an important rate in financial markets,” Dr Lowe said.
“It is also consistent with the Board's expectation that the cash rate will remain at its current level for some years, but not forever.”
The program will commence tomorrow.
How will banks respond this time?
When the RBA lowered the cash rate by 0.25% earlier this month, 52 lenders in our database announced they would be passing on the full cut to their variable rate customers.
That included all four major banks. After Westpac moved to reduce rates by 0.25% not long after the RBA’s decision, the rest of the Big Four quickly fell in line.
It was a show of enthusiasm we hadn't seen since the first cut of 2019.
Given how the current crisis has developed, there is an expectation that most banks will do right by households and businesses and pass on the full cut again, but whether or not they’ll be able to do so remains unclear.
If they opt to cut, anyone servicing a mortgage could find themselves in a much better position financially — whether they decrease the size of their repayments or continue paying down their loan at the same pace.
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