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High unemployment underpins RBA decision, says governor

Adrian Flores
Adrian Flores
03 November 2020 2 minute readShare
High unemployment underpins RBA decision, says governor

The cut in the official cash rate as well as an introduction of quantitative easing have been driven by concerns around the high rate of unemployment, says Reserve Bank of Australia governor Philip Lowe.

Earlier today, the RBA decided to reduce the official cash rate from 0.25 of a percentage point to another record low of 0.1 of a percentage point.

In addition, it introduced a package of further measures aimed at creating jobs and a post-COVID economic recovery, including the purchase of $100 billion of government bond of maturities of around five to 10 years over the next six months.

In a statement released today, Mr Lowe said the policy decision is aimed at addressing the high rate of unemployment, and is complementary to the steps taken by the federal government, including in the recent budget, to support jobs and growth.

“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,” Mr Lowe said.

“At the same time, the RBA’s Term Funding Facility is contributing to low funding costs and supporting the supply of credit to the economy. To date, authorised deposit-taking institutions have drawn $83 billion under this facility and have access to a further $104 billion.”

Further, Mr Lowe said the board is not expecting to increase the cash rate for at least three years, or at least until actual inflation is sustainably within the 2 to 3 per cent range.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market,” he said.

RBA decision a positive move but concerns banks are disincentivised to lend

In response to the RBA policy package, CreditorWatch chief economist Harley Dale said that while a cut of 15 basis points won’t do much to stimulate demand overall, the cut will have a positive impact on the Australian economy.

“If at least some of the cut is passed on to mortgage rates, then it will help boost a residential property market that already appears to be in recovery mode,” Mr Dale said.

“The housing market has a broad reach into other areas of the Australian economy, and so the boost a cut would provide should not be underestimated.”

Chief executive of small business lender Lumi, Yanir Yakutiel, said it’s great that the focus is on stimulus, especially given the amount of uncertainty in global markets around both COVID and the US election.

However, he said a problem that could occur by lowering interest rates is that it doesn’t incentivise the banks to lend more.

“The issue in the Australian economy isn’t a waning demand for capital, it’s not even really in the supply side. What we have here is a distribution problem,” Mr Yakutiel said.

“Lower interest rates, if anything, make it harder for banks to lend profitably at a time we really need to have capital ready and willing to go where needed.”

High unemployment underpins RBA decision, says governor
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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