RBA interest rate decision: Cash rate on hold, economic outlook still 'highly uncertain'

The Reserve Bank’s decision on Tuesday to leave the cash rate target at 0.25 per cent will continue to dampen the effects of the coronavirus crisis on borrowers under pressure, with interest rates expected to remain at record lows for some time.

The RBA said the worst of the global economic contraction as a result of coronavirus had now passed and the downturn was not as severe as earlier expected, but the outlook remained “highly uncertain”.

In a statement after the August board meeting, RBA governor Philip Lowe said the economic recovery was “uneven and bumpy”, with the Victorian coronavirus outbreak having a major effect on the local economy.

The RBA also said support measures were working, and an accommodative approach to monetary policy will be “maintained as long as it is required”.

AMP Capital economist Shane Oliver says the decision to leave the cash rate unchanged will mean mortgage rates stay where they are. He also says any future decision by the RBA to drop the cash rate won’t have much effect on bank interest rates.

“The RBA could drop the cash rate to 0.1 per cent but they don’t want to go to negative rates. Even if they did, it would only have a small impact on mortgage rates.”

Oliver argues while record low interest rates are helping to support the property market, other factors are having more of an influence.

“High unemployment, the effect of the Victorian lockdown and weakness in the rental market are weighing more heavily on property than interest rates at the moment.”

The likelihood the RBA will leave the cash rate at 0.25 per cent for some time is good news for mortgage holders, especially those facing financial challenges, says financial adviser Alex Jamieson from AJ Financial Planning.

“Property investors can breathe a sigh of relief with interest rates expected to remain low for at least the next two years. With the Australian government bond only paying 0.26 per cent on a two-year term, this provides us with some indication of where the markets think the interest rates are headed, which is nowhere. The market is pricing in no material hikes for the next two years,” he says.

Jamieson says low interest rates should provide some support to the property market. “But any significant pullback in the business cycle or a prolonged recession could see the property market decline by between 3 per cent and 10 per cent.”

GSFM investment strategist Stephen Miller says since the last RBA meeting, COVID-19 infection rates have climbed significantly in Victoria, which only serves to cement the central bank’s cautious approach to monetary policy.

But he says while the RBA is unlikely to change the cash rate, it may use other tools in its arsenal. “It may leave open the option of scaling up its limited bond purchase program should there be a marked deterioration in the current outlook.”

Miller argues the difficulty for the housing market in the current climate is not interest rates but job security and the prospect of unemployment.

In the RBA’s baseline outlook, the unemployment rate is expected to hit 10 per cent by the end of 2020, before falling gradually to 7 per cent over the next few years. In the statement, the extension of various income support measures as a “welcome development”.

“The bank has noted for a while monetary policy is close to exhausted and a fiscal response is a more effective form of support for the economy. That Australia has relatively high household debt but relatively low public debt also argues for fiscal policy to do more of the heavy lifting.”

As a result, in the immediate term the housing market will require support in the form of fiscal measures such as the continuation of the JobKeeper and HomeBuilder programs or tax cuts. It’s likely to be a similar story next month.

So expect the RBA to leave the cash rate at 0.25 per cent in September as well.