SYDNEY, Australia – Australia’s interest rate could see its last cut late in the week, which would reach its lowest practical limit at 0.25%.
Interest rates in the country could sink to its lowest level at 0.25% on Thursday as the Reserve Bank of Australia (RBA) tries to control the effects of the spreading coronavirus in the country. Following the declaration of the RBA that it would let loose quantitative easing (QE) before the weekends, experts expect the final slash of the interest rate ahead of the supposed schedule.
The RBA plans to inflate the money supply of the country, implementing the first QE as the coronavirus spreads. Following months of speculation, the RBA decided to implement QE in Australia, which marks the first one for the country.
According to Phillip Lowe, the RBA Governor, said on Monday that the financial system of Australia is going to adjust with the impacts of COVID-19. And with that, the federal government and financial regulators in the country are going to join forces in making sure that the financial market operates continually. He also stated that both the government and regulators would ensure that credit remains available to businesses and households as well.
In response to the country’s efforts to keep the financial markets in place, the RBA stands ready to buy the government bonds in the country in the secondary market. It is to support the for a smoother operation of the market, which is a critical pricing benchmark for the financial system.
By buying up the government bonds, the RBA can expand the money supply of the country. The Reserve Bank also stated that it would participate in repo operations. It means they are going to on-sell those government bonds before buying those back from investors for a marginally inflated cost.
Previously, the RBA repeatedly said that it would rather avoid doing such measures, but whenever it is necessary, the central bank is ready to unleash.
Meanwhile, Gareth Aird, the chief economist at Commonwealth Bank, said that with the recent RBA announcement, they expect that the central bank will cut the rate to its lowest on Thursday.
The forthcoming rate cut comes after the surprising slash that the US Federal Reserve made to its interest rate. The move from the US central bank, which now brings the interest rate to 1%, surprised the market.
The early rate cut in the US is also a significant reason why the chief economist for Betashares, David Bassanese, agreed with Mr Airth in stating that there is a massive chance for a rate cut from the RBA. The scheduled meeting for the Australian central bank is in April, but Mr Bassanese said that an announcement could come weeks before the scheduled meeting.
The market widely expects the rate cut from the Fed to come this week, and the central bank didn’t wait any longer, said Mr Bassanese. He also stated that there were hopes that the new slash can help provide the boost in market sentiment, but it backfired. He cited that the US futures were going down early in the morning today.
If anything, Mr Bassanese commented that the early move from the Fed robbed the market its opportunity to leverage on the bearish market rally before the scheduled ruling Wednesday morning.
With the disruption in global economic growth, central banks from all over the world are trying to find effective ways to suppress the economic impact of the spreading COVID-19.
Further, the US Federal Reserve led the QE expansion overnight to reach around $1.13 trillion. On Monday, the RBA is also moving towards the same efforts as it said that the central banks stand ready to start with its QE program to help boost the money supply of the country. More details are to come during the announcement scheduled on Thursday this week.
Aside from the impending rate cut, Mr Airth also stated that they are expecting for the RBA to declare more details about the QE or the asset purchase program. He said that they are also waiting for the Reserve Bank to provide the target points for the yields instead of stating its intention to buy a specified number of bonds.
The central bank has repeatedly said that it is ready to start implementing quantitative easing to help Australian’s financial system. However, the Reserve Bank has also said that it will only resort to such if required and with the interest rate at 0.25%, which is the effective lower bound.
As experts believe, a rate cut from the Reserve Bank is now only waiting for the official announcement.
Meanwhile, in its neighbour, the Reserve Bank of Australia also decided to slash its interest rate overnight. As part of its stimulus attempts as the impact of the coronavirus pandemic spreads, the scale in the country is currently at 0.75%.
Right now, the RBA is executing what little efforts it can to help try and turn the button for as long as the condition in the financial market warrants.
And while the QE program from the RBA can help boost Australia’s financial supply, it can also increase asset prices in the country. It can pose a massive risk towards the country’s market, for one. Experts previously warned that using any QE-style program can start a housing bubble. Such moves can also boost the cost of less risky assets as the Reserve Banks starts buying them. In turn, it can reduce the rate of return and would force Australians to take much more significant risks to gains the same results.
Unconventional monetary policies like the QE program will decrease investment returns, which would discourage cash inflows in the country from investors. With the Australian dollar demands decrease, which is currently at its 10-year low, its value will also go down.
The current and future economic climate doesn’t look great for Australians wanting to travel or purchase imported goods. However, it is good news for the economy as it raises demands for less expensive Australian products and goods.
Overall, with the spreading coronavirus continues to impact not just Australia negatively, but the global economic growth, the RBA has a minimal choice on the matter.