RBA reaches a new low with a cash rate of virtually 0%
So all year we’ve been talking about the fact that the official cash rate was at the historic low of 0.25%. Well in the cash rate limbo dance, the RBA has flexed its back muscles and dropped the rate to an even more historic low of 0.1%. Yep, that’s right, the cash rate is now effectively at 0%.
This move actually came as no surprise, particularly after comments by Phillip Lowe in September. Then, he said that the RBA were examining all ways to stimulate the economy as we head into Christmas. Their policy seems to be that it’s better to overstimulate than under stimulate and there was a consensus among economists that this would mean a rate cut today.
The RBA sees dealing with the ‘high rate of unemployment as an important national priority’. Today’s package of measures is designed to boost the employment rate as much as possible.
Dropping the official cash rate is a key measure, but it isn’t the only trick up their sleeve. The RBA has decided to unleash a full arsenal of measures to help buoy up the economy. This includes:
- the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next 6 months
- a reduction in the target for the yield on 3-year Government bond to 0.1%
- a reduction down to 0% in interest on Exchange Settlement balances, and
- a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%
The aim is to support the Australian economy as it recovers from the recession and then the impact of the COVID pandemic.
The rate cut is also hoped to persuade home buyers to re-enter the market. Regional areas with good access to the city are expected to see strong interest as buyers move away from the city in search of a better home/life balance, particularly with working-from-home becoming the norm.
Either way, it will be interesting times ahead for people with a mortgage – borrowing money has never been so cheap. Many people will be seeing this as an opportunity to invest in property beyond their first home, or to increase their existing portfolio. First home buyers will struggle to build a deposit as long interest rates won’t help, but will find a loan much more affordable.
How much, if any, of this rate cut banks will pass on to customers is anyone’s guess but there will be a lot of pressure for them to offer competitive rates. Talk to us to see how you can best take advantage of this new rate and new cash environment.
Whether or not we’ll see another rate cut in the near future is anyone’s guess. The statement ends with the Reserve Bank affirming that they are prepared to do more if necessary so watch this space.