Reserve Bank holds interest rates at 0.25% as Victorian virus outbreak clouds outlook

RBA governor Philip Lowe declared the ‘worst of the global contraction has now passed’ as the bank held rates steady for the fourth month in row.

THE RBA has held official interest rates steady at 02.5 per cent. Picture: AAP

The Reserve Bank Governor has declared the “worst of the global contraction” over but urged the government to maintain extraordinary levels of fiscal support “for some time”.

His view came as the Reserve Bank kept monetary policy unchanged for the fourth month in a row on Tuesday. The official cash rate has been held at the record low of 0.25 per cent since an extraordinary meeting in March, where the RBA also launched a quantitative easing program to keep to keep government borrowing rates low. The RBA has purchased over $50bn in federal and state government bonds since then to keep yields on 3 year government bonds at 0.25 per cent.

In a statement following the RBA board’s July meeting on Tuesday, Dr Lowe said the RBA would keep record levels of monetary policy support the same, stressing signs of “general pickup” in the local economy despite massive uncertainty.

“Conditions have, however, stabilised recently and the downturn has been less severe than earlier expected,” he said.

“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,” the statement said.

In April Dr Lowe said total hours worked in the economy might plunge 20 per cent by June but recent figures suggest employment is slowly rising following a 10 per cent decline.

The monthly statement on monetary policy came as economists fretted a new lockdown in Victoria follow a spike in cases of the coronavirus, potentially state-wide for a number of weeks, would crush economic growth and confidence in the nation’s second largest state.

“Uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans,” the governor said pointedly.

“The pandemic is also prompting many firms to reconsider their business models,” he said.

In general, public statements by RBA official have become a little more optimistic since April.

Last week deputy governor Guy Debelle said the economy’s performance had “turned out to be somewhat better” in the June quarter than expected. “If everything ceases at the end of September, yes, that would be a problem,” he said, referring to the government’s JobKeeper wage subsidy program, scheduled to cease on September 27.

“If everything ceases at the end of September, yes, that would be a problem,” he said, referring to the government’s JobKeeper wage subsidy program, scheduled to cease on Septem

The RBA has also expressed some surprise share prices had climbed so fast given the prospect of a severe recession. The ASX 200 rose above 6000 this week, leaving the benchmark index up by one third since its March.

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.

More to come