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Cash rate cut to new historic low

The Reserve Bank of Australia has cut the cash rate by 15 basis points to a new historic low of 0.10 per cent.

RBA Governor Phillip Lowe said of the board decision: “In Australia, the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria”.

“It will, however, take some time to reach the pre-pandemic level of output.

“In the central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022. The unemployment rate is expected to remain high, but to peak at a little below 8 per cent, rather than the 10 per cent expected previously.

“At the end of 2022, the unemployment rate is forecast to be around 6 per cent.

“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. In the most recent quarter, year-ended CPI inflation was 0.7 per cent and, in underlying terms, inflation was 1.25 per cent.

“The Board views addressing the high rate of unemployment as an important national priority. Today’s policy package, together with the earlier measures by the RBA, will help in this effort.

“The RBA’s response is complementary to the significant steps taken by the Australian Government, including in the recent budget, to support jobs and economic growth.”

Graham Cooke, insights manager at Finder, said that, despite predictions from experts, the November rate cut was not a fait accompli.

“For the first time since 2011, the RBA has declared a Cup Day cut despite some skepticism from experts around the effectiveness of further monetary stimulus measures,” Mr Cooke noted.

“But significant considerations like the strength of the Australian dollar and a lagging Victorian economy have supported the case for further easing.

“I suspect the horse races weren’t the only thing punters were betting on today,” Mr Cooke said.

Ahead of the expected cut, Shane Oliver, Chief Economist at AMP Capital, said: “The RBA’s own forecasts show that it will not achieve its employment and inflation objectives over the next two years and so further easing is required to help address this”.

HIA Economist Tom Devitt said Australia is experiencing below-target inflation and elevated unemployment.

“The risks for the economy are highly asymmetric, with the costs of doing too little likely to be far greater than the costs of doing too much.

“The RBA’s balance sheet expansion is also significantly behind that of other central banks. This is putting upward pressure on the Australian dollar, weighing on exports and potentially turning consumers towards imports rather than domestic goods and services.”

Last month Dr Lowe said the RBA does not expect to be increasing the cash rate for at least three years, comments he backed up again today.

“In terms of inflation, our forward guidance has been forward looking – we have focused on the outlook for inflation, not just current inflation,” he told Citi’s 12th Annual Australia and New Zealand Investment Conference.

“This was a sensible approach when the inflation dynamics were relatively stable and well understood. In today’s world, things are much less certain. So we will now be putting a greater weight on actual, not forecast, inflation in our decision-making.

“In terms of unemployment, we want to see more than just ‘progress towards full employment’.

“The Board views addressing the high rate of unemployment as an important national priority. Consistent with our mandate, we want to do what we can do, with the tools we have, to ensure that people have jobs.

“We want to see a return to labour market conditions that are consistent with inflation being sustainably within the 2 to 3 per cent target range.

“The Board will not be increasing the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range.

“While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market.”

Today Dr Lowe added given the outlook for both employment and inflation, monetary and fiscal support will be required for some time.

“For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.

“Given the outlook, the Board is not expecting to increase the cash rate for at least three years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.”

 

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Nathan Jolly

Nathan Jolly was an in-house journalist with Elite Agent. He worked with the company from July 2020 to December 2020.