It’s official – interest rate is at historic low

The RBA has made a rate cut to 0.1% today and announced QE to jumpstart the Australian economy back to life following the effects of COVID-19.
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RBA interest rate represented by big green digits 0.10 percent

Unprecedented times call for unprecedented measures.

Today, the Reserve Bank of Australia (RBA) found itself in unchartered territory after it cut the Australian official cash rate by 15 basis points to 0.1%, making it the lowest official cash rate in Australian history.

In addition, the RBA announced a quantitative easing (QE) program, in which it would purchase $100 billion worth of 5 to 10-year government bonds over the next six months.

The move is being made in a bid to stimulate the Australian economy, which only last week was declared by the RBA itself to be “technically out of recession”. Despite this assertion, the economy is still showing symptoms of a recession with the RBA announcing that the unemployment rate is set to peak at 8%. By the end of 2022, the bank expects the unemployment rate to be around 6%.

Here are some major highlights from the RBA meeting today:

  • Official cash rate cut from 0.25% to 0.1%.
  • QE program worth $100 billion.
  • Yield target on the Australian 3-year bond cut to 0.1%.
  • The bank expects GDP growth to be around 6% in the year to June 2021 and 4% in 2022.
  • The unemployment rate is expected to peak at 8%, below the 10% the RBA had been previously expecting. By the end of 2022, the unemployment rate is expected to be around 6%.
  • The bank is forecasting underlying inflation to be at 1% in 2021 and 1.5% in 2022, well below its target of between 2% and 3%.

How the market reacted after the announcement

The Australian dollar immediately fell to US70.38 cents from US70.60 cents after the announcement. The Australian government bond yields also fell across the curve with the 3-year, 5-year, and 10-year yields all falling slightly.

Why was the rate cut necessary?

Former RBA governor, Ian Macfarlane, suggested that Australia’s hand was forced by central banks in the United States and Europe when they cut their own rates to unprecedented lows, even to negative territory.

Mr. McFarlane says that record low rates have not done “any good” but “when the majority do it, you really have no choice.”

The RBA believes if it does not join the US Federal Reserve and European Central Bank in slashing rates, money will flood into Australia as overseas investors look for higher yields.

This will, in turn, push the Australian dollar higher – a scenario which is not in Australia’s best interest as it attempts to fight its way out of a recession.

What impact will the rate cut have on ordinary people?

Manager at website Finder, Graham Cooke, believes further cuts will not make dramatic changes to the finances of ordinary Australians.

“The cash rate has already dropped 125 basis points in the last two years, so a further 15-point cut is unlikely to have much of an impact on the economy,” Mr. Cooke said.

Australia and New Zealand Banking Group Ltd (ASX: ANZ) Chief Executive, Shayne Elliot, said that “lowering interest rates to record new lows is unlikely to encourage extra borrowing, but lower loan repayments will leave a bit more money in people’s pockets to spend, hire, and invest.”

What other developments are ahead?

The RBA will release its quarterly statement on monetary policy on Friday 6 November, which will contain its latest economic forecasts.

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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post It’s official – interest rate is at historic low appeared first on Motley Fool Australia.

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