The RBA has kept interest rates on hold at 0.25%, shocking absolutely nobody

(AAP Image, Mick Tsikas)
  • The Reserve Bank of Australia (RBA) has left the official cash rate on hold at 0.25%.
  • Having effectively run out of conventional monetary policies, the RBA board revealed it is increasingly concerned with the shape of Australia’s recovery.
  • With little room to cut interest rates, RBA Governor Philip Lowe encouraged the Australian government to step in and increase spending to support the economy.
  • Visit Business Insider Australia’s homepage for more stories.

The Reserve Bank has kept the official cash rate on hold at 0.25% but warned of a “bumpy” road to recovery.

Coming just days after the Victorian government announced an escalating series of costly lockdowns, RBA Governor Philip Lowe said there were some tough months ahead.

“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” Lowe said in his statement from the RBA board’s August meeting.

While maintaining that the situation isn’t as severe as earlier expected, the head of the central bank remains concerned over Victoria and the impact the pandemic is having on the state.

“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy,” he said.

Out of monetary ammunition, Lowe used the statement to again try to corral – in his own subtle way – the federal government to step in and do some more heavy lifting.

“The Australian Government’s recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market,” he said.

“In [our] baseline scenario, output falls by 6% over 2020 and then grows by 5% over the following year. In this scenario, the unemployment rate rises to around 10% later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs. Over the following couple of years, the unemployment rate is expected to decline gradually to around 7%.”

Unflappable – and a committed three forecast kind of guy – Lowe believes a stronger recovery is still possible if Australia can get on top of the virus from here on out. Logic of course dictates, as Lowe articulates, that the opposite is also a possibility.

“On the other hand, if Australia and other countries were to experience further widespread lockdowns, the recovery in both output and the labour market would be delayed,” he said.

Evidently much is pinned to Victoria’s response and how well it and other states can quell future outbreaks.

“Australia’s economic recovery had been ahead of schedule before Victoria’s second lockdown. Now it hangs in the balance. Victoria is now locked down for at least six more weeks and it is unlikely that Victoria will be in a position to open up in a meaningful way before the end of this year,” Indeed Asia-Pacific economist Callam Pickering said in a note issued to Business Insider Australia.

Despite the great necessity for direct stimulus, however, Pickering says there’s either little appetite or aptitude to deliver it.

“Does the Reserve Bank really intend on doing nothing for the next half-decade? If several years of unemployment above 7% and missing inflation targets isn’t sufficient to explore further easing then what will? And is it plausible that the federal government will commit to widespread stimulus for years to come?” he said.

All eyes then fall to Victoria and how its shutdown tracks over the coming weeks. Success or failure may well dictate the country’s next moves.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.