RBA declares rate hold but urges banks to increase lending

Despite fears of future negative rates from the corporate community, the RBA has held firm, electing to hold the cash rate at 0.25%, where it has sat since its emergency rate cut in mid-March.

Today’s decision falls in line with the bank’s previous rhetoric. On multiple occasions Reserve Bank Governor, Philip Lowe has been quoted as saying that the cash rate is “extraordinarily unlikely” to drop into the negative, most recently affirming this stance during the recent FINSIA Forum on 21 May, a panel discussion between Australian financial regulators.

“I said previously that it was extraordinarily unlikely that we would have negative interest rates and there has been no change,” Dr Lowe said.

“The board is not contemplating negative interest rates in Australia. I think the costs of that exceed the benefits.”

However, in past weeks the corporate world has been quietly preparing in case of a rate drop.

John Elias, leader of national law firm Minter Ellison’s debt capital markets practice told The Australian that it was planning for contingencies.

“We’re that close to the (zero) line, so it’s on the radar; you have to plan for contingencies,” he said.

“It’s now a first-order issue for corporate treasury teams.”

The markets, too, have been wary of the RBA’s rhetoric. The ASX 30 Day Interbank Cash Rate Futures hovered at above or below the 50% mark for most of the month, with the data alone painting a picture that today’s decision was contentious, despite Lowe’s assurances.

Looking in overseas markets, England has been reviewing the possibility of negative rates.

Recently, Bank of England (BOE) governor Andrew Bailey told MPs that negative rates were under review, despite previous comments that the bank was not “planning or contemplating” the move.

"We do not rule things out as a matter of principle,” he said.

“That would be a foolish thing to do.

"But that doesn't mean we rule things in either."

Calls for banks to increase lending

According to Mr Lowe there is a limit to what monetary policy can do, and the banks, along with fiscal support, will continue to play a large role in Australia’s economic recovery.

In addition to measures the banks have already taken, during his speech at the FINSIA Forum Mr Lowe said that it was “in the banks' own interest” to support customers by making credit available.

“[Australian financial institutions] are helping us to build the bridge to the point when the virus is contained and our economy recovers,” he said.

“As part of this effort, it is both understandable and desirable that lenders draw on the buffers that were built up in better times.

“It is in the banks' own interest and in the interest of the broader Australian community that banks support their customers now and also support them in the recovery phase when credit will be needed so that businesses can once again expand.”

Mr Lowe also noted that Australian financial regulators were “committed” to assisting lenders in their ability to provide continued financial support to the economy, and listed some of the measures already taken.

Regulator	Measures taken
RBA	Enacted policy measures designed to keep funding costs low for lenders
The Government	Has granted six-month exemptions from responsible lending obligations to lenders who are providing credit to existing small business clients.
ASIC	Has been encouraging lenders to work closely with clients and to provide them with the short-term assistance they need to aid longer-term viability.
APRA	Has provided banks with temporary changes to its bank capital ratios, allowing them to draw upon buffers.

Mr Lowe also said that RBA monetary policy measures implemented in March appeared to be working “as expected”, according to early evidence.

“Banks have reduced their lending rates to record lows, with interest rates for small business declining the most,” he said.

“The yield on 3-year bonds has settled at the target and the government bond markets in Australia are working well again.”

To date, the RBA has bought $50 billion of government bonds. Although it has scaled back in recent weeks Mr Lowe said the RBA is prepared to scale up again if required.

Catch-up: RBA policy measures so far

• Cash rate reduced to 25 basis points
• Bond buying program with aim to achieve a 3-year yield target of 25 basis points
• Term Funding Facility created to give banks the equity they need to support customers

Vaccine will determine recovery

During the Q&A portion of the FINSIA Forum, Mr Lowe warned that economic recovery would be dependant on the finding of a coronavirus vaccine.

According to Mr Lowe, without a vaccine the economy would take a lot longer to bounce back as people feared for their health.

"We might get a vaccine, we might get some anti-viral medication but it's also possible that we don't, so we have an incredible lot riding on the work of the scientists," he said.

"If we don't get breakthroughs on the medical front then I think it's going to be quite a slow recovery.

"Everyone is going to be nervous about their health, so they won't want to spend."

Australia’s economic position

According to Australian Bureau of Statistics (ABS) Labour Force Data, between March and April just under 600,000 people left their jobs.

Total hours worked fell by around 9.2% and the unemployment rate rose to 6.2%. The participation rate decreased by 2.4 percentage points to 63.5%.

The underemployment rate – a figure measuring the number of people who are capable of fulltime work but can’t get enough hours, or those who are in positions below their qualifications – also rose, increasing to 13.7%, a 4.9 percentage point jump.

In total, the ABS say this data correlates to a rate of 1 in 5 people who were employed in March as having left employment or had their hours reduced. That’s 2.7 million people.

Although Mr Lowe says the Australian financial system is “resilient” and “well placed to deal with COVID-19”, there is consensus that times are tough – perhaps the toughest.

During his 21 May address, Mr Lowe said that Australia was living through “the biggest and the most sudden economic contraction since the 1930s”.

Equally, Prime Minister Scott Morrison made similar comments when addressing the National Press Club on 26 May, highlighting the challenges that would face this year’s budget.

“The backdrop for that Budget will be one of the starkest our country has seen,” he said.

“The most challenging domestic and global economic environment we have faced outside of wartime.”

Currently, 3 million Australians are receiving the JobKeeper payment and well over a million are on JobSeeker payments.

Both schemes, however, are due to end come September. The 6-month JobKeeper payment will cease and the JobSeeker payment will half, reverting to its Newstart rate of $550 per fortnight.

JobMaker plan

Mr Morrison, however, has a plan, announcing his intention for industrial relations reform during his National Press Club address.

“We need a JobMaker plan for a new generation of economic success, that can guarantee the essentials that Australians rely on,” he said.

“As we reset for growth, our JobMaker plan will be guided by principles that we as Liberals and Nationals have always believed in, to secure Australia’s future and put people first in our economy.”

Mr Morrison wants to see industrial relations reform to allow Australians to be trained in the skills businesses require, believing there are discrepancies in the current system between states.

“We need Australians better trained for the jobs, businesses are looking to create because that’s important,” he said.

“For prospective students, the large number of choices that they face for qualifications can be bewildering and overwhelming.

“Compounded by a lack of visibility over the quality of training providers and the employment outcomes for those courses.”

Mr Morrison says that working groups will be chaired by Industrial Relations Minister, Christian Porter between now and September, with an aim for unions and employers to reach an industrial relations consensus.

"We've booked the room, we've hired the hall, we've got the table ready," Mr Morrison said.

"We need people to get together and sort this stuff out. As I say, they've been caught in grooves for too long, and grooves going in parallel lines and not coming together.

"And that's why I'm hoping this process will achieve. It may succeed. It may fail. But I can assure you, we're going to give it everything we can."

Sources:

• RBA Governor Phillip Lowe as quoted in The Australian: RBA’s Philip Lowe calls on banks to increase their coronavirus lending to support the economy
• ASX 30 Day Interbank Cash Rate Futures prediction for June
• John Elias as quoted in The Australian: Negative rates on the corporate radar despite Reserve Bank claims they’re ‘unlikely’
• BOE Governor Andrew Bailey as quoted by Sky News: Coronavirus: 'Foolish' to rule out negative rates says BoE governor
• RBA Governor Phillip Lowe remarks to FINSIA Forum
• ABS Labour Force, Australia, Apr 2020 Survey
• Prime Minister Scott Morrison 26 May address National Press Club
• ABC: Scott Morrison takes responsibility for Federal Government's $60 billion JobKeeper mistake

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