The Reserve Bank has slashed rates again. Picture: AAP Image/Joel Carrett
The Reserve Bank has slashed rates again. Picture: AAP Image/Joel Carrett

Expect ‘major hit’ to economy, incomes

Reserve Bank governor Philip Lowe has fronted the media for an extraordinary speech after announcing a historic interest rate cut this afternoon.

The central bank held an unscheduled emergency meeting today in response to the coronavirus crisis, and voted to slash the official cash rate from 0.5 to 0.25 per cent - the lowest it is prepared to go.

Speaking shortly after Prime Minister Scott Morrison's own press conference, Mr Lowe warned more pain was to come - and that we should expect "significant job losses".

He said we were living in "extraordinary times" and were facing a "very serious situation" as the COVID-19 pandemic continued to wreak havoc on the local and global economy.

In response to this unprecedented crisis, the central bank has devised a package with several elements - including cutting the cash rate to 0.25 per cent, setting a target for the yield on three-year government bonds, supplying credit to business and an adjustment in interest rates on accounts financial institutions hold with the RBA.

"Over recent decades, the Reserve Bank practice has been to target the cash rate, which forms the anchor point for the risk-free yield structure," Mr Lowe explained.

"We're now extending and complementing this by also targeting a risk-free interest rate further out along the yield curve.

"In particular, we're targeting the yield on three-year Australian Government securities and we have set this target at around 0.25 per cent. It's the same as the cash rate."

The third part of the package is a term funding facility for the banking system with support for business credit, especially to small and medium-sized businesses.

It is designed to lower funding costs for the entire banking system so that the cost of credit to households and businesses is low, and also to encourage lenders to support credit 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. Assisting small businesses through this period will help us build that bridge to the other side when the recovery does take place. If Australia has lost lots of otherwise viable businesses through this period, making that recovery will be harder," Mr Lowe said.

Under this new facility, authorised deposit-taking institutions will have access to at least $90 billion in funding.

And the fourth element is an adjustment to the interest rate on "exchange cement balances".

"We operate a corridor system under the cash rate. Under that system, the balances that the banks hold at the RBA overnight in exchange settlement accounts earn an interest rate 25 basis points below the cash rate," he said.

"On the other side of the corridor, in the event that a bank needed to borrow from the RBA overnight it would be charged an interest rates 25 basis points above the cash rate. Under this arrangement, and with the cash rate now at 25 basis points, the interest rate on exchange settlement balances would have been at zero.

"We've decided to increase this interest rate to 10 basis points."

Mr Lowe described these measures as the key that will help us "build a bridge" and eventually bounce back from the current disaster.

He said he expected the official cash rate to remain at its historic low level for an "extended period of time" and that the board was bracing for a "major hit to the economy" and incomes.

He said there would be "significant job losses" and that the scale of those losses would "depend on the ability of businesses to keep workers on".

"It's also important to repeat that we are expecting a recovery once the virus is contained. The timing and strength of that recovery will depend upon how successful we are as a nation in building that bridge to the other side," Mr Lowe said.

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