Reserve Bank keeps interest at 0.25 per cent

The Reserve Bank has kept the interest rate at the historically low level of 0.25 per cent, warning that Victoria’s lockdown was hurting the economy.

The Reserve Bank of Australia has kept the official interest rate at 0.25 per cent but has warned Victorian restrictions are causing a massive dent to the state’s economy.

In its monthly monetary statement, the central bank resolved to maintain the cash rate at 25 basis points, noting policy measures were sufficiently supporting the Australian economy.

The decision is in line with the majority of Australia’s economists who were not expecting any change to the RBA’s policy settings.

Economists at ANZ, Westpac and Commonwealth Bank all forecasted no change to the official interest rate.

The Reserve Bank of Australia has kept the official interest rate at 0.25 per cent. Picture: Joel Carrett/AAP

RBA governor Philip Lowe said the downturn was not as severe as first thought, however ongoing stage four restrictions in Victoria were having a major impact on the state’s economy.

“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.

“Employment increased in June and July, although unemployment and underemployment remain high.”

Unemployment rates are tipped to peak at 10 per cent later this year, before gradually declining to about 7 per cent in two years.

The central bank also warned wage growth and price pressures were forecast to remain subdued for sometime, with inflation expected to increase by 1 to 1.5 per cent over the next two years.

Unemployment rates are tipped to peak at 10 per cent later this year. Picture: William West/AFP

Mr Lowe said the bank would not consider lifting the cash rate until inflation targets of 2 to 3 per cent were met.

The bank has decided to extend the term funding facility, which was implemented at the beginning of the pandemic. It is funding mechanism that provides cheap liquidity to Australia’s banking system.

“Fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment,” Mr Lowe said.

Mr Lowe also noted a depreciating US dollar and strong demand from China for commodities had pushed the Australian dollar to its highest level in two years.

CommSec chief economist Craig James said COVID-19 has fuelled the biggest economic contraction since 1945, with the Commonwealth Bank’s investment arm forecasting a June quarter fall in economic activity of more than 5 per cent.

CommSec chief economist Craig James says COVID-19 has fuelled the biggest economic contraction since 1945.

June quarter gross domestic product figures to be released on Wednesday are expected to reveal more of the financial damage incurred from the pandemic.

“The Australian economy probably fell 5.4 per cent in the June quarter to be down 4.7 per cent on the year,” Mr James said.

“The quarterly decline will be the biggest on record going back over 60 years. The annual decline in the economy would be the biggest since 1945.”

Mr James also warned the number of $50 and $100 notes in circulation was growing at a double-digit rate, a sign consumers were fearful about economic uncertainty.

Originally published as Reserve Bank keeps interest at 0.25 per cent