The RBA has officially cut interest rates to their lowest level on record in the fight against the economic fallout from the coronavirus.
In an emergency meeting yesterday, the RBA reduced the official cash rate to 0.25 per cent down from 0.5 per cent. The RBA has only recently cut the cash rate from 0.75 per cent at its monthly meeting at the start of March.
On top of this, the board also announced they would be buying back buy government bonds of varying maturities, in a bid to keep interest rates for banks low – at around 0.25 per cent.
The move by the RBA was made to ensure there would be sufficient liquidy for banks.
The central bank also said it would set up a $90 billion special funding facility for commercial banks to help with their pressures on their margins.
The scheme will offer banks funding at a fixed rate of 0.25 per cent, in a bid to allow affordable lending to small and medium-sized businesses.
According to RBA Governor Lowe, the virus will pass but the board is determined to help protect the economic fallout.
“At some point, the virus will be contained and the Australian economy will recover,” he said.
“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.
“Australia’s financial system is resilient and well-placed to deal with the effects of the coronavirus.
“The banking system is well capitalised and is in a strong liquidity position.
“Substantial financial buffers are available to be drawn down if required to support the economy.”
Property price uncertainty
In a statement from CoreLogic, the group was unsure what the impact of these rate cuts would be for property prices.
“Under normal circumstances, such an extraordinary move from the Reserve Bank might be greeted with renewed optimism towards housing market activity,” CoreLogic said in a statement.
“Research from the Reserve Bank points to an inverse relationship with changes to the cash rate and property prices; when interest rates fall, housing prices typically rise.
“This was a significant factor in the rapid value upswing in residential property from June 2019.
“However, the current situation of extreme uncertainty and economic fragility makes it difficult to expect housing market activity to lift against the historically low cost of debt.”
CoreLogic also noted the decision was based on need but appears the RBA might have reached their lower limit.
“The announcement from the RBA was driven by economic necessity,” Corelogic said.
“It is aimed at keeping the Australian dollar low, ensuring borrowing costs are stimulatory for businesses and households, and helping to stabilise and capitalise credit markets.
“However, it is the same economic weakness and uncertainty that is likely to keep consumer spirits low.
“Thursday’s decision is also significant because 0.25 per cent has also been described by the RBA as the effective lower bound of the cash rate.
“The effective lower bound is the point at which further reductions to the cash rate will not encourage any further spending or benefit to the economy.”
No room to move
Graham Cooke, insights manager at Finder, said the cut was prudent in these unprecedented times.
“After the US cut its rate by 100 basis points and New Zealand cut by 75 this week, it was inevitable that the RBA followed suit,” Mr Cooke said.
“The problem is that, after five cuts in the last 12 months, the RBA has far less room for stimulus than those other central banks.
“The RBA has said they do not intend to ever cut below 0.25 per cent, so this really is our lowest possible rate.”
Time to pass on the cuts
Dan White from Ray White is pushing the banks to pass on these rates cuts as soon as possible.
“We’re calling on all the banks and lenders to pass on their rate easing in full, just as they did only 16 days after the latest rate cut,” Mr White said.
“Market forces set prices but we can help create the competitive environment through our skilled agents and marketing.
“There will always be people looking to transact.
“Our members will always be able to create competition for our buyers and sellers in any market that we are faced with.
“We are prepared and ready to work in this ‘new normal’ environment.”