In a move specifically designed to help boost the economy, the Reserve Bank (RBA) has cut interest rates to a record low of 0.1%, from the previous low of 0.25%. They have also given a clear indication that rates are unlikely to increase for at least three years.
As well as the rate cut, they have also committed to buying $100 billion of bonds at both a national and state level to further help stimulate economic activity – so-called ‘quantitative easing’.
Although this is often seen as being a measure that could trigger a rise in inflation, they feel they have sufficient scope to do this as inflation is currently at just 0.7%, well below the bank’s stated target range of 2-3%.
The reasons for the Reserve Bank of Australia interest rate cut
The idea behind both measures is they’ll stimulate economic activity by encouraging individuals and businesses to borrow money to invest, and therefore stimulate activity and growth.
Announcing the measures on 2 November, RBA governor, Andrew Lowe, spoke of the ‘dire state of the Australian economy’ and said that ‘if we need to do more, we will’.
The federal treasurer, Josh Frydenberg, said the rate cut was ‘good news for households, good news for small businesses and it will complement what the Morrison government has already undertaken to support job creation across the economy’.
Coming soon after the treasurer’s recent budget statement, which announced a package of measures to support business and help drive investment and hopefully economic growth, it’s a clear sign that laissez-faire economics are not an option when it comes to the huge challenges posed by the Covid-19 pandemic.
The government have made it clear they are prepared to pull many economic levers to drive growth, and now the RBA are complementing their moves with dramatic steps of their own.
Part of an ongoing process
Since the Covid-19 outbreak in March, there have been a series of economic responses. It started with the initial stimulus package in March, further stimulus announcements midway through the year, and the treasurers budget statement in October. Now the RBA have also stepped in.
You’ll recall that, in the 2020 budget, treasurer Josh Frydenberg announced a whole series of policies designed to help individuals and businesses weather the current economic storm, and to continue to grow and invest as things start to settle down.
The centrepiece was the bringing forward of tax cuts originally planned for 2022, and there were other measures designed to support business including:
- Increased access to a range of small business tax concessions by reducing the small business entity turnover threshold to $10 million
- Allowing all businesses with turnover less than $5 million to deduct the full cost of eligible capital assets purchased before the end of June 2022
- Enabling eligible companies to carry back tax losses from the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years.
What this means for you
In a bid to actively help drive growth, the government and the RBA have created an environment that is very conducive to borrowing to invest in your business.
The bank rate has never been anywhere near as low as this, and that should reflect in the loan rates lenders will charge. It also makes mortgage lending attractive – especially with the RBA confirmation that rates should stay at this level for at least three years.
The rate reduction will particularly help you if:
- You’re looking to buy a property or remortgage to raise money for home improvements. It’s expected mortgage rates will reflect the record low rate, in a bid to stimulate the housing market
- You’re a business owner looking to raise money to invest in your business
- You’re a net exporter, as measures should help keep the AUD competitive to help boost export activity.
Summary
It’s hoped that the combination of the RBA’s bond purchases, and lower interest rates, will help the country recover from the economic shock of the Covid-19 pandemic.
Lower borrowing rates will provide a welcome boost for homeowners – assuming lenders pass on rate reductions. They will also help to support businesses looking to invest for growth by creating a hospitable financial climate.
The hope is that business growth can lead us out of this recession. However, the economic recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.
The recent positive news from pharmaceutical company, Pfizer, regarding a vaccine should help improve business and consumer confidence.
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