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Interest rates hit 0.1 per cent – and likely to stay that low for three years, says RBA

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The Reserve Bank has slashed official interest rates to 0.1 per cent and predicted rates would not start rising for at least another three years as it introduced a raft of measures to spark an economic recovery.

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Banks will be under pressure to pass on the rate and if they do variable mortgages will be closer to 2 per cent. Some of the smaller lenders have already moved.

Among the RBA measures will be a $100 billion program of buying government debt (quantitative easing) in the secondary market.

Despite implementing what seems drastic measures the RBA also gave an upbeat assessment saying recent economic data had been a bit better than expected and the near-term outlook was better than it was three months ago.

The RBA has scaled back its forecast of unemployment to a peak of just below 8 per cent from 10 per cent previously. By the end of 2022, it would be about 6 per cent.

It also believes the economy grew in the September quarter after two quarters of negative growth, which put Australia in recession.

However, RBA governor Philip Lowe said stimulus would be needed for some time and the recovery would be bumpy and drawn out and everything remained dependent on the successful containment of COVID-19.

“The global economy has been recovering from the initial virus outbreaks, with the recovery most advanced in China. Even so, output in most countries remains well short of pre-pandemic levels and recent virus outbreaks pose a downside risk to the outlook, particularly in Europe,” Lowe said.

“In Australia, the economic recovery is underway and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria.

“It will, however, take some time to reach the pre-pandemic level of output. In the central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022.

“At the end of 2022, the unemployment rate is forecast to be around 6 per cent.

“Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time.

“For its part, the (RBA) board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target 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.

“This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1.5 per cent in 2022. In the most recent quarter, year-ended CPI inflation was 0.7 per cent and, in underlying terms, inflation was 1.25 per cent.

“The board views addressing the high rate of unemployment as an important national priority.

“Given the outlook, the board is not expecting to increase the cash rate for at least three years. The board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.”

The full list of RBA measures was:

The bank said that under the program to purchase longer-dated bonds, it would buy bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split.

“The bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program,” Lowe said.

 

 

 

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