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RBA Flexes Monetary Policy Levers to Support Economic Recovery

RBA Flexes Monetary Policy Levers to Support Economic Recovery

From the Desk of the Chief Economist

Today the Reserve Bank of Australia (RBA) enacted several monetary policy levers, in a bid to provide extra support to the economy as it recovers from a unique recession brought on by COVID-19. The RBA acknowledges the need to drive down unemployment (thus growing the jobs market) and lift inflation to a level that is within the RBA’s target band of 2.0-3.0%. 

Monetary Policy Decisions

  • Official cash rate cut to 0.1%
  • Reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%
  • Reduction in the interest rate on Exchange Settlement balances to Zero
  • Reduction in the target for the yield on the 3-year Australian Government bond to around 0.1%
  • The purchase of $100billion of government bonds of maturities of around 5 to 10 years over the next six months.

The cash rate cut, if passed on in full by commercial banks, will mean that a person with a $300,000 mortgage would save approximately $23 per month. A lesser mortgage payment means more money for the household budget, and the RBA expects that this will be spent on other items – both retail and services – thus having a multiplier effect on stimulating the economy as a whole.

A caveat is that a lower cash rate will mean lower interest payments to savers, particularly those with deposit accounts on variable rates. Banks will need to balance this out to ensure savers keep their money in the bank.

The RBA’s Term Funding Facility is contributing to low funding costs and supporting the supply of credit to the economy, particularly to small and medium businesses. To date, authorised deposit-taking institutions have drawn $83billion under this facility and have access to a further $104billion. An interest rate cut on this front, which should be passed on to customers, will further alleviate any financial stresses that small and medium-sized businesses are currently facing.

An expansion on the RBA’s bond-buying program is expected to assist in ensuring that long-term interest rates remain stable. It will also allow for more cash flow to the Australian Government and any other States and Territories. 


From an economics perspective, traditionally the RBA uses such measures when the economy is on the decline or in trouble.

However, we need to remind ourselves that the current recession is not an economic or financial recession as we traditionally know it – for example one such as the Global Financial Crisis (GFC). The current recession is a byproduct of a global health pandemic, which has forced us to restrict movement (and thus business practices). 

The RBA’s monetary policy decisions today are best viewed as a preventative measure, to increase household income and encourage spending, in a bid to prepare us for any further economic downturn. Particularly as a return to pre-COVID-19 unemployment rate is not expected until 2022, where it is expected to remain high at a little below 8.0% before returning to around 6.0%. 

From a property perspective, we are already seeing a strong recovery in many markets, with the expectation of further activity now that Melbourne/Victoria is no longer in lockdown and Queensland has partially opened its borders to a larger part of New South Wales.

Data from the Australian Bureau of Statistics (ABS) released on Monday 2nd November showed between August 2020 and September 2020 the number of dwellings approved for construction nationally increased by 15.4%. Annually (September 2019 to September 2020) this represents an 8.8% increase. 

The ABS recorded a 9.7% jump in approval for houses between August 2020 and September 2020, and a 23.4% increase in unit and apartment approvals. On an annual basis (September 2019 to September 2020) this represents 20.7% increase for houses and a -12.1% decline for unit and apartment approvals.

Real estate agents across the board are seeing a huge uplift in the September quarter 2020 in terms of enquiries, and a lower cash rate will no doubt propel this even further.

Already the ABS reported new loan commitments showed a 5.9% increase for mortgages in September 2020. Owner-occupier loans increased by 6.0% from August 2020 to September 2020, whilst investor loans increased by 5.2%. Annually (September 2019 to September 2020) this is a 33.8% increase for owner-occupiers and a 4.2% increase for investors.

Today the RBA forecasts that GDP growth is expected to be approximately 6.0% over the year to June 2021 and 4.0% in 2022. The enactment of these measures by the RBA today is expected to have a positive multiplier effect on the property market. 



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