The Reserve Bank of Australia (RBA) has announced today the official cash rate remains on hold at 0.25%. It has remained at a historic low since late March this year.
The RBA Board has made it clear it will not increase the cash rate until there is progress being made towards full employment and inflation is sustainably within the 2-3% target band.
While a negative cash rate hasn’t been ruled out, the RBA governor Philip Lowe has stated it would be an “extraordinarily unlikely” move. He has previously argued 0.25% is effectively zero interest anyway. It would also put pressure on the Australian dollar.
In an RBA quarterly statement on monetary policy, it said:
COVID-19 and the Australian economy
The latest announcement from the Reserve Bank comes after Australia declared its first recession in almost 30 years. The April-June quarter figures saw the economy shrink by a record 7% — the biggest decline since the government began records in 1959.
Since late March, the official cash rate has been set at a historic low of 0.25%. The Reserve Bank made history by cutting the cash rate twice in March as a result of the COVID-19 global pandemic.
When the World Health Organisation (WHO) declared COVID-19 a global pandemic, Australia quickly shut the borders and implemented strict social distancing requirements. This shutdown in activity resulted in heavy losses for the tourism and hospitality industries. It also saw the worst unemployment rate in 22 years as more than one million Aussies lost their jobs.
In addition, the national budget deficit is expected to reach a record high. According to the Lowy Institute, at the end of the decade, the Australian government debt “may well be more than half a trillion dollars higher than it would otherwise have been” as a result of the pandemic.
The Australian economy also faced a setback when Victoria saw a second wave of infections and introduced stage four lockdown measures in August, which still continue to be in place.
What is the RBA cash rate?
In a nutshell, the Reserve Bank is Australia’s central bank and is responsible for monitoring and looking after the economy. They establish the monetary policy to ensure Australia has a healthy economy and strong financial system in place. How do they do this? By setting a cash rate.
Essentially, the cash rate is the interest rate at which Australian banks and lenders borrow funds from the RBA and other lending institutions. It acts as a benchmark rate for the rest of the country including everything from mortgages, savings accounts, and the exchange rate. The cash rate is influenced by factors such as inflation, employment, economic growth, the international economy, and the performance of the Australian dollar.
On the first Tuesday of each month (except for January), the RBA board gathers together to review and set the cash rate. Whether they decide to increase, decrease, or hold the cash rate, any changes are done in 0.25% increments and take place the next day.
Why does the cash rate matter?
Simply put, the cash rate affects how much Aussies can borrow money. No matter what it’s for, the official cash rate is intended to influence banks and their interest rates.
Whether you’re a homeowner or looking to buy your first property, keeping up to date with the cash rate is important as any changes will impact banks’ interest rates. For example, if interest rates are low, it may entice you to take out a home loan and buy property. If you’re already a homeowner and have a variable rate home loan, your interest (and monthly repayments) will reduce. If you have a fixed rate loan, you could refinance to take advantage of low interest rates.
On the other hand, when the interest rate goes up, mortgages could become more expensive to take out. This is why Aussies might be looking to take advantage of low interest rates and take out mortgages while the cash rate is currently at a record low.
While a low cash rate is good news if you want to take out a home loan, it’s not so great for savings accounts. This is because the lower the cash rate, the less interest you’ll earn on the money in your bank account.
Often, the RBA lowers the cash rate in order to stimulate consumer spending and economic growth. If consumers spend more, then businesses will produce more, leading to an increase in economic activity and employment. This is why, during times of recession and increasing unemployment figures, the cash rate often goes down. As previously mentioned, the official cash rate is likely to remain low for several years as Australia weathers the economic fallout of the COVID-19 pandemic. During Australia’s last recession in the 1990s, the official cash rate declined from above 17% to below 5% over the course of three and a half years.
To find out what the cash rate has previously been, we’ve included a table of all the past rates since October 2019:
|Effective Date||Cash Rate||Change|
|2nd October 2019||0.75%||-0.25%|
|6th November 2019||0.75%||0.00%|
|4th December 2019||0.75%||0.00%|
|5th February 2020||0.75%||0.00%|
|4th March 2020||0.50%||-0.25%|
|20th March 2020||0.25%||-0.25%|
|8th April 2020||0.25%||0.00%|
|6th May 2020||0.25%||0.00%|
|3rd June 2020||0.25%||0.00%|
|8th July 2020||0.25%||0.00%|
|5th August 2020||0.25%||0.00%|
|2nd September 2020||0.25%||0.00%|
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