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RBA governor ends guessing game, reveals rate forecast

Maja Garaca Djurdjevic
Maja Garaca Djurdjevic
14 August 2020 2 minute readShare
RBA Governor

“Will they, won’t they?” is something financial punters have been debating for months as we approached that first Tuesday of the month and the official RBA rate reveal day. However, the RBA governor has now quashed the guessing game, hinting that the historically low rate of 0.25 of a percentage point will remain in place for years.

In his opening statement to the House of Representatives Standing Committee on Economics, governor Philip Lowe said that the bank is sticking to its plan to refrain from a cash rate increase until progress is made towards full employment and inflation is suitably within 2–3 per cent target range.

Mr Lowe professed that given that this will likely be off the cards for “at least three years”, the cash rate is also unlikely to budge forward for some time.

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“The board has clearly indicated that it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target range,” Mr Lowe said.

“These conditions are not likely to be met for at least three years. So, it is highly likely that the cash rate will be at this level for some years, and having a target for three-year yields of 25 basis points reinforces this message.”

 

He explained that while the RBA has not completely ruled out adjustments to the mid-March package, its view is that the best course of action is to continue with the current package.

“The board recognises that in the unique circumstances in which the country finds itself, the solutions to the challenges we face lie in areas other than monetary policy.”

The RBA’s mid-March package was concocted at its extraordinary meeting in March and included a reduction in the cash rate to 25 basis points.  

According to Mr Lowe, this response was designed to keep funding costs low across the economy and support the provision of credit, especially to small and medium-sized businesses.

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“To support these businesses, the term funding facility provides banks with an additional $5 of low-cost funding for every extra dollar of credit extended to them,” the governor noted.

‘No free lunch’

In his opening statement, the governor also addressed a monetary policy option that has been the subject of public discussion over recent months: the possibility of the RBA creating money to directly finance government spending.

He said that while for some this offers the possibility of a “free lunch”, the reality is that the monetary financing of the budget is not on the agenda in Australia.

“There is no free lunch. There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently,” he said.

“As I spoke about in a talk last month, it is certainly possible for a central bank to use monetary financing to affect when and how government spending is paid for.

“Depending upon how things are managed, it can be paid for through the inflation tax, by implicit taxes on the banking system and/or higher general taxes in the future. But it does have to be paid for at some point.”

RBA governor ends guessing game, reveals rate forecast
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Maja Garaca Djurdjevic
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of My Business. 

Maja has a decade-long career in journalism across finance, business and politics. Now a well-versed reporter in the SME and accounting arena, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies and enabling citizens to influence decision-making.

You can email Maja on [email protected] 

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