RBA Newsflash – April 2020


Updated April 7th 2020

The Reserve Bank Australia (RBA) has held fire keeping interest rates on hold and its other policy settings unchanged at its April board meeting.

The RBA “reaffirmed” its “comprehensive policy package” it announced last month. The RBA also state that it is “committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus”.

Tuesday’s decision followed unprecedented changes in March, when the RBA implemented significant stimulus measures, in an effort to support businesses and households through the economic downturn caused by the coronavirus pandemic. 

On March 3, the RBA cut the cash rate from 0.75 per cent to 0.5 per cent.

Then at an emergency meeting on March 19, the RBA introduced a package of measures to support the economy through the downturn: the cash rate was cut to 0.25 per cent and there was a commitment to not increase the cash rate until the economy has clearly recovered; the purchase of government bonds to lower the three-year government bond interest rate to 0.25 per cent (“yield curve control”); a $90 billion funding facility to encourage banks to lend to small and medium-sized businesses; and an increase to the interest rate on banks’ funds deposited at the RBA.

The RBA will be a support act to the Government over the next few months

The RBA’s stimulus package will support the economy during the crisis by lowering loan repayments and providing low-cost loans to businesses, which will help households and firms that have their incomes reduced. The RBA is also working with other regulators to ensure the financial system remains “stable and resilient” during the crisis. 

But during the lockdown phase over the next few months (and possibly longer), Governments have a more important role to play in helping workers and businesses survive the downturn. Accordingly, the RBA will play a secondary role. 

This is because, unlike previous recessions, this economic downturn is a choice: Governments are shutting down or severely limiting the output of large sectors of the economy to slow the spread of coronavirus in an effort to save lives. Only essential services are operating at full capacity. 

Most other economic downturns are caused by a “demand-side” shock, such as the global financial crisis, which resulted in job losses and people cutting back spending.

Curtailing non-essential economic activity in the short-term makes sense from both a health and an economic perspective. If the lockdown is successful in limiting the spread of the virus, then the economy should be able to rebound faster than if the virus spread more widely and caused more deaths, which would inevitably lead to a longer and more severe shutdown.  

The second-round impacts of the lockdown will be more like a typical recession: when people lose jobs or work reduced hours they will cut back on spending, which will lead to job losses in other sectors (for example, cutting back on online shopping and food delivery services). Lower interest rates will limit this second-round impact of the lockdown. In Tuesday’s statement, the RBA referred to the “coordinated monetary and fiscal response” that will “support jobs, incomes and businesses” during the downturn. 

The RBA will have a more important role to play in the rebound from the downturn. Low interest rates, concessional loans and the commitment to keep rates low will provide stimulus and encourage households and businesses to borrow, invest and spend. 

The unemployment rate is going to rise substantially and this will hit the property market

The economic downturn will result in many people losing jobs, working fewer hours or shutting their businesses. Many people are facing an extended period of unemployment, which will cause significant social and economic harm. 

The unemployment rate will rise dramatically in coming months. Most economists predict that the unemployment rate will jump to about 10 per cent by June, almost double the 5.1 per cent recorded in February and the highest point since 1994.  

The rise in unemployment will understate the true level of job destruction caused by the coronavirus-induced recession.

This is because the definition of unemployment requires a person to be actively seeking work and available to start work.

Many people who lose their jobs will be discouraged by the lack of available jobs and will not look for work. Some people may be scared to work due to a fear of getting sick, while others might not be able to work if they have to look after children if schools close. Many who are stood down will receive the JobKeeper payment, which will technically mean they are still employed even if they are not working.

The unemployment rate will also not capture the many people who will be forced to work fewer hours. These workers will be classified as under-employed. 

The rise in the number of people out of work or working fewer hours and business closures will also hit the property market.

People whose incomes have fallen will be less able, and less willing, to take out a mortgage and buy their first home, upgrade or downsize. For those with a mortgage, paying it off will be much harder on a reduced income. Investors will also be under pressure and will be cautious during the downturn.

The drop-off in demand for property will follow the restrictions on transacting real estate that governments have implemented, such as in-person auctions and open for inspections, which have slowed the market.

The combination of it being harder to transact and a drop-off in demand will contribute to property sales falling while the economy is in hibernation. This slowdown will not only hurt the property industry but it will also affect related industries such as retail, conveyancing and construction, as well as state government revenues.

Higher unemployment will also contribute to property prices falling, but the drop-off is likely to be smaller than the decline in sales. This is because there will likely be minimal forced selling, which is what would cause significant price declines. 

The Government’s financial support packages, particularly JobKeeper, will mean many home owners and investors will be able to keep paying off their mortgage, but it will probably require cutting back on other spending. For those who can’t afford their mortgage, banks are offering to defer mortgage repayments. While people will try and avoid deferring their mortgage repayments if they can as it may increase their interest costs, it won’t negatively affect their credit score. Owners considering selling but who don’t need to are likely to hold off until the economy and property market rebounds.

So there’s unlikely to be an avalanche of forced selling in the coming months, which will help limit price falls.

However, this may not be the case if the economic downturn lasts well into 2021. By then, banks may withdraw the mortgage deferral offer and government support could potentially become less generous.

The RBA will need to do more if the downturn is more severe than anticipated 

The RBA’s stimulus package is significant but there is scope for more aggressive action if the economic downturn is deeper and longer than expected.  But as the RBA noted in its statement there is “considerable uncertainty about the near-term outlook for the Australian economy”.

The RBA could introduce more explicit forward guidance about the economy’s performance before it starts raising rates. The bank could also shift to quantitative easing, which involves a set amount of purchase of government bonds, rather than the more timid yield curve control. 

If you are concerned about your future interest rate and want to explore your finance opportunities, then please contact us to investigate your options.