RBA makes historic rate cut

by Madison Utley19 Mar 2020

Following an emergency meeting held this afternoon, the Reserve Bank of Australia (RBA) has stepped up the action it's taking to support the domestic economy in response to the spreading impact of the COVID-19 pandemic - as has become the norm at central banks around the world in days past. 

Effective tomorrow, 20 March, the official cash rate will be slashed to a new record low of 0.25%.

The RBA has previously communicated that 0.25% is its floor; rather than moving to 0%, the central bank will likely look to other support measures moving forward. 

According to Canstar group executive of financial services, Steve Mickenbecker, “The major banks are likely to feel the obligation to cut again, especially if they too are convinced that this is the last of the cuts and that the announced RBA support measures will be sustained.”

“What better way for the RBA to spend its last 0.25% than in convincing the markets that they are all on the same team,” he added.

According to Canstar analysis, if the 0.25% cut is passed on by lenders, borrowers will likely see a further $56 in monthly savings on the average loan; however, there is little confidence this will stimulate consumer spending.

“Loan repayment savings have not found their way into retailers’ tills, as people are reacting to the uncertain environment logically and getting ahead on their loans,” said Mickenbecker.

“No amount of encouragement at the moment will get people spending on anything other than the necessities.” 

Mickenbecker highlighted the contrast between the options available to the RBA during the Global Financial Crisis (GFC) in 2008, and the paths forward that were available now.

In 2008, the RBA had a pre-GFC cash rate of 7.25%.

“The markets could see that there was plenty of capacity for the RBA to support the economy, unlike the position today with a 0.50% cash rate,” said Mickenbecker.

While there has been some concern expressed over the RBA eating through the entirety of the available margin, Mickenbecker is confident today’s decision was warranted.  

“There is little point in the RBA saving what's left of the cash rate for a rainy day, when today is a cyclone,” he said.

“With the RBA making a 0.25% cut to the cash rate a fortnight ago, another cut [today is] a strong signal of its intent to use its market operations to support the economy.”