- The Reserve Bank of Australia has held the cash rate steady at its all-time low of 0.25 per cent and expanded its Term Funding Facility this afternoon
- The facility scheme was introduced in mid-March as a way to encourage banks to pass on lower interest rates to borrowers
- The facility has been expanded so banks have access to additional funding equal to two per cent of their outstanding credit at 0.25 per cent interest for three years
- As far as its economic outlook goes, the RBA said the second COVID-19 outbreak in Victoria will likely slow down Australia’s recovery
- Unemployment is expected to rise to 10 per cent by the end of the year, then gradually decline but stay around seven per cent for at least two years
- Inflation is expected to sit between one and 1.5 per cent for the next few years, with wage and price pressures subdued for the foreseeable future
The Reserve Bank of Australia has, as expected, held the cash rate steady at its all-time low of 0.25 per cent this afternoon.
Governor Philip Lowe revealed that on top of the held cash rate, the central bank has expanded its Term Funding Facility to further support big banks in an era of low interest.
Essentially, the Term Funding Facility was introduced by the RBA in mid-March as a way to encourage banks, or authorised deposit-taking institutions (ADIs), to pass on lower interest rates to borrowers. Under the facility, the Reserve Bank offers three-year funding to ADIs to with additional funding available if they expand their lending to business while COVID-19 continues to spread.
Today, the RBA expanded the facility so banks have access to additional funding equal to two per cent of their outstanding credit at 0.25 per cent interest for three years. Banks can draw on this extra funding until the end of June 2021.
So far, ADIs have drawn $52 billion under the Term Funding Facility, with a total $200 billion available after today’s changes.
What about the economy?
While the expanded Term Funding Facility is certainly doing its part to support the Australian economy, investors are likely more concerned with what the RBA’s outlook is, especially in light of the recently-introduced Victorian lockdown measures.
RBA Governor Philip Lowe said while a global economic recovery is underway, the speed of the recovery still depends on the containment of the coronavirus.
In Australia, we’re still experiencing the biggest economic contraction we’ve seen since the 1930s. However, the RBA Governor said it’s not as bad as initially thought.
“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia,” he said. “This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”
Speaking of Victoria, the Governor said the second virus outbreak of COVID-19 in Victoria is likely to slow Australia’s economic recovery.
“The virus outbreak in Victoria and subdued growth in aggregate demand more broadly mean that it is likely to be some months before a meaningful recovery in the labour market is under way.”
RBA Governor Philip Lowe, September 2020
Employment and inflation
As far as employment is concerned, the Reserve Bank said Australia saw an increase in employment over June and July, but unemployment and underemployment are still high. What’s more, things are likely to get worse before they get better.
The Governor said in the Bank’s central scenario, the unemployment rate will rise to around 10 per cent by the end of the year before it begins a gradual decline. However, the RBA said it expects unemployment to still be at seven power cent in two years’ time.
As for inflation, the RBS said it expects an average rate of between one and 1.5 per cent for the “next couple of years”. Wage and prices pressures are still subdued and expected to remain so for the foreseeable future.