Record low-interest rates will be with us until 2023 and beyond according to Reserve Bank governor, Dr. Phil Lowe.
He told a rare media conference yesterday that he expects the record low cash rate of 0.25% will be around for at least three years as the country fights the COVID-19 virus and its impact on economic growth, business and employment.
In his first-ever media briefing, he said the country will survive, but not without short term pain with lower growth, higher jobless numbers and a negative impact on businesses larger and small.
Mr. Lowe warned more pain was to come – and that we should expect “significant job losses”.
He told his briefing that we were living in “extraordinary times” and were facing a “very serious situation” as the COVID-19 pandemic continued to wreak havoc on the local and global economy.
“…we are expecting a major hit to economic activity and incomes in Australia that will last for a number of months. We are also expecting significant job losses. The scale of these losses will depend on the ability of businesses to keep workers on during this difficult period.”
Importantly Dr. Lowe made it clear there would be no extra funds provided for mortgage lending or to developers from the $90 billion and other lending programs.
The central bank yesterday unveiled a package of several elements – including cutting the cash rate to 0.25%, setting a target for the yield on three-year government bonds of 0.25%, supplying $90 billion or more in credit to business and an adjustment in interest rates on accounts financial institutions hold with the RBA. The Federal Government will provide a further $15 billion for small banks and other groups that fund small businesses outside the banking system.
“We have chosen the three-year horizon as it influences funding rates across much of the Australian economy and is an important rate in financial markets. It is also consistent with the Board’s expectation that the cash rate will remain at its current level for some years, but not forever.
The package is a term funding facility for the banking system with support for business credit, especially to small and medium-sized businesses.
It is designed to lower funding costs for the entire banking system so that the cost of credit to households and businesses is low, and also to encourage lenders to support credit to businesses, especially small and medium-sized businesses.
“This is a priority issue for us. Many small businesses are going to find coming months very difficult as their sales dry up and they support their staff. Assisting small businesses through this period will help us build that bridge to the other side when the recovery does take place. If Australia has lost lots of otherwise viable businesses through this period, making that recovery will be harder,” Mr. Lowe said.
Under this new facility, authorised deposit-taking institutions will have access to at least $90 billion in funding.
And the fourth element is an adjustment to the interest rate on “exchange settlement balances” in the exchange settlement accounts banks and other institutions maintain at the RBA.
On present indications, the ESA (exchange settlement accounts) will see a rapid rise in the amount of money left in these accounts from $2 billion a couple of weeks ago to $20 billion on Thursday and around $100 billion when the bond-buying and other measures are up and running.
Mr. Lowe described these measures as the key that will help us “build a bridge” and eventually bounce back from the current disaster.
He said he expected the official cash rate to remain at its historic low level for an “extended period of time” and that the board was bracing for a “major hit to the economy” and incomes.
He said there would be “significant job losses” and that the scale of those losses would “depend on the ability of businesses to keep workers on”.
It is also important to repeat that we are expecting a recovery once the virus is contained. The timing and strength of that recovery will depend in part upon how successful we are, as a nation, in building that bridge to the other side.
“When that recovery does come, it will be supported by the low level of interest rates. We will maintain the current setting of interest rates until a strong recovery is in place and the achievement of our objectives is clearly in sight,” Mr. Lowe said.
