Actual cash rate sitting lower than 0.25%

by Madison Utley08 Jul 2020

While the Reserve Bank of Australia (RBA) yesterday held the official cash rate at 0.25% for the fourth month in a row, a researcher has helped explain how lenders have managed to continue cutting their interest rates nonetheless.   

“The RBA has been clear that they consider the 25 basis point setting to be the lower effective bound; further cuts to the cash rate may not provide additional economic stimulus beyond the current setting,” explained CoreLogic head of research Tim Lawless.

“[However] in a recent address by Deputy Reserve Bank Governor Guy Debelle, it was made clear that although the cash rate target has remained at 25 basis points, the actual cash rate traded in the market has reached around 13-14 basis points, which contributes to further reductions in funding costs.”

From the time the RBA board meeting was held in June to yesterday's July gathering, there has been evidence of a turnaround in the economy, albeit from an “unprecedented low base”. 

“Housing markets have shown a mixture of resilience and recovery, with home values recording only mild falls to date and home sales bouncing back after plunging in April,” said Lawless. 

“CoreLogic platform data indicates real estate agent activity is now tracking at slightly higher levels than a year ago and new listing numbers are up 43% from the recent low in early May and purchase related valuation events have increased by a bit more than 20%.”

While the low cash rate setting, ongoing stimulus and easing of social distancing measures have contributed to the improving of the economy, Lawless believes it’s too early to entirely relax.

“The RBA has previously stated they see the Australian economy tracking somewhere between the best case scenario and central case scenario, highlighting the benefits of an earlier than expected flattening of the virus curve and wind-back of restrictive economic policies,” he said. 

“Despite the stable rate setting, it is clear the economy is still under some pressure from downside risk, with the key risk [being] a second wave of the virus. The recent, sharp rise in virus cases across Victoria is a reminder of the fragility the economy is facing and the importance of keeping the virus in check.”