The RBA has announced its latest decision on monetary policy as economic uncertainty becomes the new normal.
The RBA held interest rates at 0.25 per cent.
“The global economy is experiencing a severe downturn as countries seek to contain the coronavirus. Many people have lost their jobs and a sharp rise in unemployment is occurring,” governor Philip Lowe said in a statement. “At the same time, the containment measures have reduced infection rates in a number of countries. If this continues, a recovery in the global economy will start later this year, supported by both the large fiscal packages and the significant easing in monetary policies.”
Governor Lowe has previously indicated that this is the effective lower bound for rates in Australia and that rates won’t be raised until the bank makes “sustainable progress” towards its goals for inflation and full employment.
“We are yet to see the full extent of the hit to the economy from the coronavirus-related shutdowns and it will take several years to fully recover, so a rate hike is years away,” said AMP Capital chief economist Shane Oliver. “We expect the cash rate to be stuck at 0.25 per cent for at least the next three years.”
Interest rates were reduced to 0.25 per cent at an extraordinary meeting of the RBA board on 19 March, as COVID-19 roiled markets and the economic impacts of the outbreak were still up in the air. At that time, the RBA also engaged in a historic quantitative easing program to support liquidity in financial markets.
The Federal Reserve has also reduced rates to near zero, and a global low rate environment is likely to be the new normal for years to come.
“It is likely that interest rates will be at or below zero and yield curves will be flat for a very long time,” said Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors. “This is not a temporary phase. It is going to be the state of the world for some time.”