The RBA has kept interest rates on hold at 0.25%, as Australia's economy braces for the 'biggest contraction since the 1930s'

(Steve Christo)
  • The Reserve Bank of Australia has kept the official cash rate on hold at 0.25%.
  • It comes as the RBA has effectively exhausted its options, having bought $50 billion in bonds and slashed interest rates from 1.5% since last year.
  • In his statement, Lowe warned the economy was experiencing its “biggest contraction since the 1930s”.
  • Visit Business Insider Australia’s homepage for more stories.

Australia’s central bank is out of ammunition as it watches the economy get slugged by the coming recession.

Meeting on Tuesday, the Reserve Bank of Australia (RBA) decided to keep the official cash rate at 0.25%, unwilling – and largely unable – to go below its effective “lower bound”.

However, while suggesting the worst may have passed, Governor Phillip Lowe remains acutely aware of how bad things look.

“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” he said in his statement, noting a low-interest environment would be “maintained as long as it is required”.

“Since March, an unprecedented 800,000 people have lost their jobs, with many others retaining their job only because of government and other support programs.”

With JobKeeper under review and possibly on the chopping board after September, how long those unemployment figures can be suppressed remains to be seen. A market restructure, the RBA anticipates will ultimately see some businesses transform and others simply fail.

“The pandemic is … prompting many firms to reconsider their business models. As some businesses rehire workers as demand returns, others are restructuring their operations,” Lowe said.

That’s not to say there aren’t some positive signs.

“Conditions have, however, stabilised recently and the downturn has been less severe than earlier expected. While total hours worked in Australia continued to decline in May, the decline was considerably smaller than in April and less than previously thought likely,” Lowe said.

“There has also been a pick-up in retail spending in response to the decline in infections and the easing of restrictions in most of the country.”

However, while emphasising the RBA remains “committed to do what it can to support jobs, incomes and businesses and to make sure that Australia is well placed for the recovery”, it has largely done all it can when it comes to cutting interest rates and buying $50 billion in bonds.

“The [RBA] also notes that the outlook remains highly uncertain, and the recent spike in cases in Victoria — and reimposition of restrictions in response — clearly highlights this,” BIS Oxford Economics chief economist Sarah Hunter said in a note to Business Insider Australia.

“The RBA still believe it will be a long path to full recovery, and we agree — although the economy has shown more resilience than was first expected, many firms are experiencing a substantial fall in demand, and some will not be able to continue operating, particularly once government support is removed.”

The RBA has little it can do now but hope the government can manage that transition, and spend its way out of trouble.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

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