• The RBA has cut the official interest on Tuesday from 0.25% to 0.1%, as widely expected.
• As expected, the move lower was accompanied by a bigger foray into quantitative easing (QE) as well, with the RBA committing to purchasing $100 billion in government bonds of 5 to 10 years maturity over the next six month.
• It comes as Victoria remerges from lockdown and the RBA calls a third quarter of positive growth.
• Visit Business Insider Australia’s homepage for more stories.

On Melbourne Cup Day, the Reserve Bank (RBA) has burst out of the gates in tremendous fashion.

Meeting on Tuesday, the RBA Board slashed the official cash rate from 0.25% to 0.10%, another historic low, as well as unleashing much of its remaining toolkit.

“At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic,” RBA Governor Philip Lowe said.

“The elements of today’s package are as follows. A reduction in the cash rate target to 0.1%, a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1%, a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%, a reduction in the interest rate on Exchange Settlement balances to zero, [and] the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.”

The last measure sets off a major expansion of quantitative easing (QE) in Australia and much excitement, or nervousness, from Australian economists. It will expand the money supply even further and drive asset prices higher.

“The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, and supporting asset prices and balance sheets,” Lowe said.

The record low-interest rate meanwhile isn’t going anywhere.

“Given the outlook, the Board is not expecting to increase the cash rate for at least three years,” Lowe said.

Pundits weigh in

While largely expected, Australia’s eggheads are now giving their two cents on the RBA’s decisions.

CoreLogic head of research Tim Lawless said if the cut was passed on by lenders it would throw fuel on the fire for Australian property prices.

“With the trend in housing values already rising around most areas of the country, there is a good chance lower rates could see momentum building across the nation’s most valuable asset class,” Lawless said, noting stimulus was likely to outweigh current headwinds.

“The RBA’s primary focus from lower interest rates is to ensure businesses are confident enough and willing to invest, as well as encouraging households to spend. With this in mind, the RBA is likely to look through the ‘noise’ of higher housing prices in an effort to stimulate business investment, jobs growth and household consumption.”

Sarah Hunter, chief economist at BIS Oxford Economics, noted jobs remains the number one goal.

“The Board will be hoping that the full set of stimulus measures feeds through to the broader economy, particularly to non-mining businesses where investment and employment intentions are weakest,” she said.

“As ever, their top priority is jobs growth, with the statement explicitly mentioning the need to reduce the unemployment rate — which they now expect to peak at around 8%.”

Economist and former Gillard government advisor Stephen Koukoulas said they should have acted sooner.

“Full employment and 2-3% inflation were abandoned as goals a few years ago – when both were in reach. Now, they are seen as a priority & we’ll do whatever takes to get them,” he said in a tweet. “I feel for the thousands of people denied jobs earlier.”

Others maintain the cut is largely irrelevant anyway.

“With existing home and business borrowers unlikely to see much of the cut and the former unlikely to spend it even if they do, the stimulus of a rate cut to the economy will be very modest,” Canstar financial services executive Steve Mickenbecker said.

“Even if passed on fully, a cut of 0.15% to the average $400,000 over 30 years will lower the monthly repayment by $33, not enough to make much of a difference to borrowers’ spending and house purchase intentions.”

Many of the RBA’s moves were anticipated

Ahead of the announcement, the cash rate cut was widely expected.

“While the Reserve Bank held off moving in October to allow fiscal policy to take centre stage, we see a slightly better than expected inflation outcome — the RBA calling a positive quarter of growth in Q3 and the opening up of the Victorian economy — as no barrier to a November easing,” Janus Henderson investment strategist Frank Uhlenbruch said.

“Easing is most likely to take the form of a cut in the cash rate, three-year government bond yield target and TFF rate by 15 basis points from 0.25% to 0.10%. Negative rates remain highly unlikely.”

It was a popular view. Around two in three economists had forecast the move, according to a Finder survey of more than 40.

“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,” AMP Capital chief economist Shane Oliver said.

Many pointed to a change in messaging from the central bank as a sign of imminent easing. However, it’s unclear exactly how much of an impact the move lower will cause, with some suggesting it would be for political purposes rather than economic ones.

“The RBA are reluctant to move to negative rates [but] could drop to 0.1% this month as this is already an effective market rate,” ANU public policy professor and former leader of the Liberal Party John Hewson said. “No doubt [there is] political pressure to do so.”

It will also put increased pressure on banks to cut savings rates. Not that they’ve needed an excuse. Canstar analysis shows 50 Australian banks have cut since September by an average of nearly 0.20%. That’s despite no moves from the RBA since March.

For the last six months, RBA Governor Philip Lowe has been content to play his game of ‘wait and see’, wishing to see how the lockdown impacted the economy and what the federal government’s strategy looked like.

Not anymore.

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