How long will the rate stay low?

The Reserve Bank of Australia (RBA) has announced it will leave the official cash rate unchanged at 0.25 per cent.

The latest April decision follows a rare out of cycle cash rate reduction in March.

Economist Dr Shane Oliver believes back-to-back cuts is as far as the RBA should go.

“0.25 per cent has long been identified by the RBA as the lower bound,” said Dr Oliver.

“There is little benefit to be gained by going to zero or negative based on the experience of Europe and Japan.”

The cash rate should stay at this historic low as Australia heads for a COVID-19 recession, says the RBA Shadow Board set up by the Australian National University (ANU).

The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis (CAMA) at the ANU Crawford School of Public Policy. It brings together nine leading experts to examine the economy and make a call on optimal interest rates before monthly RBA Board meetings but does not try to predict RBA behaviour.

The COVID-19 pandemic is certain to push Australia into recession for the first time in 28 years, says the board, which is 94 per cent confident that keeping the cash rate on hold is the right policy to see us through this crisis.

“Many standard economic indicators are not a good guide in a fast-moving crisis,” said Shadow Board member Dr Timo Henckel. 

“For example, while the latest official ABS figures show an unemployment rate in Australia of 5.1 per cent, this may well double within a couple of months due to the COVID-19 crisis.

“It is unclear to what extent the government’s JobSeeker program will help workers remain attached to their employers.”

Volatile global financial markets and stock markets taking massive hits mean that “the outlook for the global economy is entirely dominated by the COVID-19 pandemic”, said Dr Henckel.

“The policy responses to control the epidemic are widely expected to lead to a global recession, although there’s disagreement about how deep and enduring it will be.”

Dr Henckel said efforts by the Australian government and RBA to stem the economic downturn are unprecedented and the swiftness with which they’re being implemented makes it difficult to forecast their likely impact.

“Looking ahead six months, the Shadow Board’s vote in favour of keeping the cash rate steady at 0.25 per cent is still very high – 88 per cent,” he said.

“The probability attached to both a rate cut and rate hike is six per cent.” 

How long do you expect the cash rate to stay this low? How will it affect your retirement income?

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Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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