Keeping the economy moving
Written on the 6 May 2020 by Arrow
RBA using low interest rates & easy money
Behind the scenes, the Reserve Bank of Australia (RBA) has also pulled out all stops to keep the economy moving.
RBA monetary policy is the yin to the Government's fiscal policy yang. During the current crisis it's designed to complement and to some degree pay for Government spending which already exceeds $320 billion.
On March 19, RBA Governor Philip Lowe announced a package of monetary support policies to "support jobs, incomes and businesses". These policies included maintaining the cash rate at 0.25 per cent, the creation of a $90 billion funding facility to support business lending, and the purchasing of government bonds.
Rates as low as they will go
Increased funding for SMEs
Bond buying bonanza
The RBA set out to achieve this target by buying Government bonds in the secondary market. This is a monetary policy lever it has never used before, known as quantitative easing (QE).
How does quantitative easing work?
When the RBA enters the secondary market to buy billions of dollars of government bonds, it effectively gives the Government a lot more cash to spend and this money flows through the economy.
To date, the RBA has spent more than $36 billion in bond purchases and 3-year Government bond yields have dropped to around 0.25 per cent.ii So, by spending huge quantities of cash the RBA eased monetary policy, which is a roundabout way of saying it used quantitative easing.
What does it mean for me?
As banks pass on some or all the cuts in official interest rates to their home loan customers, first home buyers are well-placed to secure a good deal. Existing homeowners might also take the opportunity to refinance.
According to Canstar, by shifting from the average variable interest rate of 3.52 per cent to the lowest rate on offer of 2.39 per cent, a borrower on a 30-year, $400,000 loan could save more than $240 a month or more than $87,400 over the life of the loan.iii
Retirees and others seeking income from their investments are not so lucky, but there are some good rates on offer if you are prepared to shop around. The best 12-month term deposit rates and bonus savings account rates are as high as 2 per cent.iv, v
These are undoubtedly difficult times, but the decisions you make now could put you in a good position when markets recover. So give us a call to discuss your financial situation.