Governor of the Reserve Bank of Australia Phillip Lowe. Picture: Joel Carrett/AAP
Governor of the Reserve Bank of Australia Phillip Lowe. Picture: Joel Carrett/AAP

RBA slashes interest rates to 0.1pc

The Reserve Bank of Australia has again slashed interest rates and implemented further unconventional monetary policies to alleviate economic pressures caused by the COVID-19 pandemic.

Confirming predictions of a Melbourne Cup Day cut, the RBA shaved 15 basis points from the official cash rate, which now stands at 0.1 per cent - the lowest on record.

At its monthly board meeting on monetary policy on Tuesday, the central bank flagged further easing was needed to help the economy and the financial system out of the health crisis.

Aside from reducing rates, the RBA said it would introduce additional quantitative easing measures.

The RBA said it would buy $100 billion worth of government bonds with maturities of around five to ten years. The purchases will take place over the next six months.

"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 in a statement.

As part of its suite of measures, the RBA will reduce its target for three-year bond purchases to 0.1 per cent.

Governor of the Reserve Bank of Australia Phillip Lowe. Picture: Joel Carrett/AAP
Governor of the Reserve Bank of Australia Phillip Lowe. Picture: Joel Carrett/AAP

It will also lower the interest rate on its term funding facility to 0.1 per cent, which is assisting in providing the banking industry with cheaper funding.

The interest rate on exchange settlement balances has been lowered to zero.

Mr Lowe warned of a bumpy recovery, with the outlook highly dependent on success in containing the virus.

"The economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria," Mr Lowe said.

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

In its statement, the RBA said it expects unemployment to peak just below 8 per cent while the inflation rate would be 1 per cent in 2021.

Mr Lowe noted subdued inflation was expected to result in lower wage growth over coming years.

The global pandemic pushed Australia's economy into its first recession in 30 years, with the RBA introducing in March a bond buying regime and term funding facility to flood the money market with additional liquidity.

Economists were broadly expecting the central bank to cut the rate to 0.1 per cent.

ANZ expected the move and for the RBA to increase its unconventional monetary policies, including the introduction of "pure" quantitative easing measures that target bonds with longer term maturities.

Quantitative easing is a form of monetary policy implemented by central banks when cutting interest rates is no longer effective because the interest rate is either at or approaching zero.

The unconventional policy is designed to promote economic growth by increasing the supply of money within financial markets.

Originally published as RBA slashes interest rates to 0.1pc


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