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RBA holds interest rates, no cut to extraordinary low

RBA holds interest rates, no cut to extraordinary low

Home loan repayments will not likely drop after the nation’s central bank held the cash rate at the historic low of 0.25 per cent, offering the financially strained little additional relief at a time when mortgage deferrals end and government payments shrink.

Speculation was rife the RBA would make the extraordinary move of cutting the cash rate by 0.15 basis points to 0.10, after senior executives hinted at the possibility at public engagements.

But at its board meeting today, the RBA decided to maintain its current policy setting until the country approaches “full employment”, claiming it is “working as expected”, by facilitating low borrowing costs and supplying credit to households and businesses.

“The Board is committed to do what it can to support jobs, incomes and businesses in Australia,” Philip Lowe said, Governor of the RBA.

“The Board views addressing the high rate of unemployment as an important national priority. (It) continues to consider how additional monetary easing could support jobs as the economy opens up further.”

A lower cut remains a possibility 

Rate cuts are typically adjusted by 0.25 per cent. Experts forecast an unusual rate cut of 0.15 per cent following comments made by senior executives that seemed to hint at the possibility. 

“Using international experience as a guide, it would have been possible to configure the existing elements of the RBA package differently,” RBA Governor Philip Lowe said in a July address

“For example, the various interest rates currently at 25 basis points could have been set lower, at say 10 basis points.”

Deputy Governor Guy Debelle stoked the flames further when he mentioned the RBA may reduce interest rates “a little more without going into negative territory” in an online speech a fortnight ago.

Banks slashed rates, economists bet on a rate cut

The response was two fold: banks began slashing rates and economists began to expect a rate cut.

Eleven banks -- including Commonwealth Bank and ING -- cut the interest rates of 57 products within the last fortnight by an average of 0.25 per cent, according to a RateCity analysis.

AMP and Westpac economists, already anticipating a rate cut, struggled to pin down when it could happen, as the RBA announcement coincided with the reveal of the Federal budget.

Westpac believed it would complicate matters and rescheduled the timing. 

“A central bank moving on Budget Day could be interpreted by the government and the bank itself as diverting attention away from the budget and complicating the government’s task in ‘selling’ the budget,” Bill Evans said, the chief economist at Westpac. 

The bank now forecasts the cut will take place on November 3.

Cutting the cash rate would offer Australians struggling to pay their mortgage a financial lifeline at a time when it’s needed, likely lowering their repayments as deferrals are ending and the government’s support payments drop.

But the extra time will allow the RBA to consider the impact of the Federal budget, Sally Tindall said, research director at RateCity. 

“If the RBA cuts the cash rate by 0.15 per cent, there’ll be pressure on the banks to do right by their existing customers,” she said.

“At a time when every dollar counts, a rate cut of 0.15 per cent would save the average mortgage holder (about) $33 a month.”

A 0.15 cut won’t make a material difference: RBA Governor

Reducing the cash rate incrementally wouldn’t provide “much of a material difference,” Governor Philip Lowe said, in his most recent testimony before a parliamentary committee

“Given the nature of the problems the country faces, us moving interest rates by five or 10 basis points isn't really going to make a material difference,” he said.

“There's not going to be much traction from that; the problems are elsewhere. 

“It's not the cost and availability of credit that's causing the weak economic activity; it's the lack of confidence; it's the shutdowns; it's the pandemic.” 

He did not rule out the possibility of cutting the interest rate in the future.

“If we get to the point where the board's judgement is that we would get traction from further adjustments in policy, then we're prepared to do that,” he said.

Will Australia have negative interest rates like some other countries?

Bank interest rates can go into the negative, a measure that’ll encourage people to borrow money at the expense of what they’d stand to make in interest rates on their savings.

But the nation’s central bank has been reluctant to institute the measure. 

Governor Philip Lowe described the move as being “extraordinarily unlikely”, claiming it would hurt the job recovery at a time when 932,000 jobs were lost in the quarter from March to June, according to the Australian Bureau of Statistics.

“My concern, at least at the moment, is that negative interest rates would make credit supply (to businesses) more difficult and that would hurt jobs,” Mr Lowe told the parliamentary committee. 

“My current view is that negative interest rates wouldn't help jobs, and, arguably, could make things worse.

“If that judgement changes, then we'll move.”

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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