Interest rates are expected to stay at 0.25% for the next 3 years at least as Australia prepares for 'a very large economic contraction'

The Australian economy will be squeezed by the coronavirus. (Photo by: Newscast, Universal Images Group via Getty Images)
  • The RBA left interest rates on hold at 0.25% on Tuesday.
  • In a statement Govenor Phillip Lowe warned “a very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years”.
  • BIS Oxford Economics chief economist Sarah Hunter said she didn’t expect a rate move to come for at least three years.
  • Visit Business Insider Australia’s homepage for more stories.

Not only are interest rates not going any lower, but they’re likely not going anywhere for a long time.

On Tuesday, the Reserve Bank of Australia (RBA) board left the official cash rate at 0.25%, after two consecutive cuts in March, as it acknowledged the coronavirus pandemic now threated a global downturn.

“The Board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus,” RBA Governor Phillip Lowe said in his statement.

“The comprehensive policy package announced last month will also support the expected recovery. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band.”

The criteria preclude any movement for years to come, according to BIS Oxford Economics.

“The board reiterated that the primary aim of monetary and fiscal policy is to soften the contraction as far as possible and ensure that the economy is well-placed to recover once the health crisis has passed,” chief economist Sarah Hunter said in a note issued to Business Insider Australia.

“[Monetary] policy will remain supportive for quite some time after this [and] the cash rate is likely to remain at 0.25% for at least the next three years,” she said, noting quantitative easing is “also likely to continue beyond the end of the pandemic” to ensure a recovery.

Certainly, the RBA is preparing for choppy waters as government lockdown measures put Australia’s economy into hibernation.

“Many countries are expected to experience large economic contractions as a consequence of the public health response. Large increases in unemployment are also expected,” Lowe said.

“Once the virus is contained, a recovery in the global economy is expected, with the recovery supported by both the large fiscal packages and the significant easing in monetary policy that has taken place.”

While financial markets had been volatile throughout March, Lowe maintained measures taken by the RBA and central banks around the world had helped in recent weeks, as the RBA confirmed its quantitative easing program had purchased $36 billion worth of government bonds since it began.

Despite boasting a “resilient… well-capitalised” economy, Lowe acknowledged there is “considerable uncertainty” surrounding the short-term economic outlook for Australia.

“Much will depend on the success of the efforts to contain the virus and how long the social distancing measures need to remain in place. A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years,” he said.

Commonwealth Bank chief economist Gareth Aird said he expected to see unemployment to officially rise to 7.8%, softened by a fall in the participation rate.

“It is our central scenario that GDP will fall by 7.5% in [the second quarter] and by 3.4% over the calendar year 2020,” he said. “Our forecast is for total job losses in the June quarter of up to 580,000.”

That’s despite large economic rescue packages unveiled by the federal cabinet in an effort to safeguard jobs, demonstrating just how difficult it is to buoy the economy against the current coronavirus crisis.

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