RBA Cash Rate Held at Record Low 0.25%
At its meeting on Tuesday, the RBA Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.
The Reserve Bank of Australia (RBA) has held the cash rate target at the record low setting of 0.25% over the past four months, and there is a strong chance that this is where the target will stay for the foreseeable future. The RBA has been clear that they consider the 25 basis point setting to be the lower effective bound; further cuts to the cash rate may not provide additional economic stimulus beyond the current setting.
The cash rate isn’t likely to rise any time soon either, with the RBA providing clarity via previous announcements that they don’t expect a lift in the cash rate until labour markets are approaching their definition of full employment and inflation is tracking towards the 2-3% target range. Both of these conditions aren’t likely to be met over the coming 12 months at least. In a recent address by Deputy Reserve Bank Governor Guy Debelle, it was made clear that although the cash rate target has remained at 25 basis points, the actual cash rate traded in the market has reached around 13-14 basis points, which contributes to further reductions in funding costs.
Since the June RBA board meeting there has been growing evidence of a turnaround in the economy, albeit from an unprecedented low base. Payroll data from the ABS shows the worst affected labour markets are gradually repairing, retail sales have surged, job vacancies have shown a modest lift and consumer sentiment readings are back around pre-COVID levels. Housing markets have also shown a mixture of resilience and recovery, with home values recording only mild falls to-date and home sales bouncing back after plunging in April. CoreLogic platform data indicates real estate agent activity is now tracking at slightly higher levels than a year ago and new listing numbers are up 43% from the recent low in early May and purchase related valuation events have increased by a bit more than 20%.
The low cash rate setting, along with ongoing stimulus measures and a relaxation, or in some cases, lifting of social distancing measures are central to the improving economic trend. In fact, the RBA has previously stated they see the Australian economy tracking somewhere between the best case scenario and central case scenario, highlighting the benefits of an earlier than expected flattening of the virus curve and wind-back of restrictive economic policies.
Despite the stable rate setting, it’s clear the economy is still under some pressure from downside risk. The key risk to an economic recovery is a second wave of the virus. The recent, sharp rise in virus cases across Victoria is a reminder of the fragility the economy is facing and the importance of keeping the virus in check.
To view the full announcement, please click here.