RBA holds cash rate as coronavirus surge puts Victorian economy in a stranglehold

The Reserve Bank of Australia left official interest rates unchanged at its August meeting this afternoon, as Victoria contends with a second wave of coronavirus infections that has put the entire country on high alert.

The worsening situation has created a fresh batch of problems for RBA Governor Philip Lowe, who only last month was touting declining infection rates and a much-needed pick-up in consumer confidence. 

In his post-meeting statement, Lowe said recovery is likely to be “uneven and bumpy.” 

He outlined a baseline scenario in which GDP falls by 6% over the year before growing by 5% in 2021. Fuelled by the recent outbreak in Victoria, unemployment is expected to reach 10% later in 2020.

“A stronger recovery is possible if progress is made in containing the virus in the near future. This progress would support an improvement in confidence and a less cautious approach by households and businesses to their spending,” he said.

“On the other hand, if Australia and other countries were to experience further widespread lockdowns, the recovery in both output and the labour market would be delayed.”

Lowe also mentioned the crucial role fiscal policy has played in keeping the economy afloat.

“The Australian Government's recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand,” he said.

“It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market.”

As for the Board’s bond purchasing activities, the yield on 3-year Australian Government Securities has crept slightly higher than the target of 25 basis points, and the Board will recommence purchases in the secondary market tomorrow.

In Victoria, the unfolding crisis will result in around 250,000 workers being stood down or sent home. They will join a further 250,000 Victorians who have been stood down since the onset of the pandemic.

According to NAB economists, just three and a half weeks of lockdown will strip the economy of around $1.9 billion. The expected impact will be detailed in the RBA’s economic forecast, due out on Friday.

What’s the outlook for home loans?

Cuts continue to flow through from lenders, with the majority applied to fixed rates. Among lenders we track, the average variable home loan rate is 3.39% p.a., while the average fixed rate sits at 2.58% p.a. for 1-year terms, 2.54% p.a. for 2-year terms, and 2.62% p.a. for 3-year terms.

Last month also saw the rollout of a few home loans with headline rates below 2.00%. First was loans.com.au’s Smart Booster Home loan, which comes with a discounted 1.99% p.a. variable rate (2.55% p.a. comparison rate*) for one year before reverting to a still competitive 2.57% p.a.

Online lender Homestar followed suit with its Star Classic Owner Occupied Special, which offers borrowers a 1.98% p.a. fixed rate (2.51% p.a. comparison rate*) for one year. The loan reverts to a 2.49% p.a. variable rate (2.51% p.a. comparison rate*) once the fixed term ends.

Mozo Director Kirsty Lamont said the existence of such low rates should have borrowers looking at their current home loan and asking if they’re paying much more than they should be.

“If you’re confident you won’t have to sell your property in the next 12 months, fixing your loan and paying principal and interest will give you access to very competitive rates,” she said. 

“It’s worth remembering though that if you need to break your loan before the end of the fixed period you can be slugged with significant break fees.”  

What about savings accounts and term deposits?

Of course, the flipside to all this is that Australians will have to work much harder when looking for somewhere to keep their savings. 

Currently, the average 12-month term deposit rate sits at 0.98% p.a. Meanwhile, the average ongoing savings rate is only 0.68% p.a., down from 0.74% p.a. one month ago. 

One saving grace has been the introduction of the Westpac Life account, which offers Australians aged between 18 and 29 a remarkable 3.00% p.a. on their savings. 

Importantly, the maximum rate is only available on balances up to $30,000, and account holders will have to satisfy a few monthly conditions, namely grow their balance, make at least one deposit, and make at least five transactions with a linked Westpac Choice debit card. 

For more information, visit our home loan, savings account and term deposit comparison pages. And if you’re after tips to keep your finances in good health amid the current crisis, browse our coronavirus financial guide