Rates will stay at new low 'for some years'

The RBA's governor said the most recent cut could linger. Picture: Shutterstock
The RBA's governor said the most recent cut could linger. Picture: Shutterstock

The Reserve Bank has made an unprecedented intervention in the financial markets, cutting rates to the lowest bound of 0.25 per cent and setting up a $90 billion fund to encourage banks to keep lending to businesses.

Reserve Bank governor Philip Lowe said the board expected the cash rate would remain at 0.25 per cent "for some years, but not forever".

The new low would stay "until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band", he said.

The government is preparing a major extension of welfare payments and relaxation of the rules that force people on the dole to apply for 20 jobs a month and meet other obligations.

Prime Minister Scott Morrison conceded that the focus was no longer on getting people off Newstart into jobs.

"We understand over the next six months, that is a certainly very different economy. When circumstances change, you need to adjust your packages to reflect that," he said.

"We're looking at those issues around income support.

"We're looking at the issues around people's obligations.

"And working really constructively, whether it's with the banks or whether it's with businesses or others to ensure that we're putting them in a stronger position to look after people.

"Where they're not in a position to be able to do that, then the government is stepping up where they can to try and cushion that impact."

READ MORE:

Last week, the government announced a $22.9 billion package of grants and tax breaks for businesses to encourage them to keep staff on and invest in new equipment. But things have moved fast, and Treasurer Josh Fyrdenberg said the second package, expected to be announced within a day or two, would be substantially different.

"We have seen the economic impact, globally as well as here in Australia, become much more significant than was evident even just a week or two weeks ago," Mr Frydenberg said.

"And so our second package is designed to ... to cushion the challenge being faced by many Australians through this.

"That includes backing small business."

The interest rate cut, if passed on by the major banks, would save home owners on a $400,000 loan, about $60 a month.

But unlike the last rate cut, just over two weeks ago, this one has not been immediately passed on to householders, with banks focused on other measures instead.

The Commonwealth Bank cut its fixed-term mortgage rate on Thursday, but no other banks have moved yet.

With the economy being brought to its knees by the coronavirus crisis, the central bank called a special meeting on Thursday to take more drastic action.

It announced a $90 billion funding facility so banks can continue lending to small and medium-sized businesses. Banks can borrow from the fund up to 3 per cent of the value of their business and household loans, and more if they lend more to businesses.

For every extra $1 they lend to large businesses, they will get access to an extra $1 in funding from the Reserve Bank; for every $1 to small and medium-sized businesses, they will have access to an additional $5.

Mr Lowe said the significant interventions came with financial and other risks to the central bank so were not taken lightly.

"But in the context of extraordinary times, and consistent with our broad mandate to promote the economic welfare of the people of Australia, we are seeking to play our full role in building that bridge to the time when the recovery does take place," he said.

The virus was causing a "major economic problem and it's having deep ramifications for financial systems right around the world".

Mr Lowe said there would be a major hit to economic activity and to incomes in Australia that would last for months.

"We're also expecting significant job losses. The scale of those losses will depend upon the ability of businesses to keep workers on during this challenging period," he said.

He described the bank's measures as a "bridge" until recovery came.

"Undeniably, what we are facing today is a very serious situation but it's also something that's temporary. As we deal with it as best we can, we also need to look to the other side when things do recover," he said.

The bank's measures were designed to lower funding costs for the entire banking system so that the cost of credit to households and businesses is low. And it would provide an incentive for banks to lend 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," he said.

"If Australia has lost lots of otherwise viable businesses through this period, making that recovery will be harder and we'll all pay a price for that."

  • For information on COVID-19, please go to the federal Health Department's website.
  • You can also call the Coronavirus Health Information Line on 1800 020 080
  • If you have serious symptoms, such as difficulty breathing, call Triple Zero (000)

We have removed our paywall from our stories about the coronavirus. This is a rapidly changing situation and we want to make sure our readers are as informed as possible. If you would like to support our journalists you can subscribe here.

This story Rates will stay at new low 'for some years': RBA governor first appeared on The Canberra Times.