Coronavirus: savers braces for new RBA hit
Savers are expected to suffer another blow on Melbourne Cup day, with RBA governor Philip Lowe expected to deliver a rate cut from 0.25 per cent to 0.1 per cent.
Savers are expected to suffer another blow on Melbourne Cup day, with Reserve Bank of Australia governor Philip Lowe expected to deliver a mini rate cut from 0.25 per cent to 0.1 per cent.
The move would see the central bank squeezing the last possible drop out of conventional monetary policy to help the country’s post-pandemic recovery.
Since the pandemic took hold in March, the RBA has cut rates 0.5 percentage points to 0.25 per cent and implemented a range of extraordinary measures aimed at making credit as cheap and as available as possible.
Three-year bond rates were tied to the cash rate as part of the bank’s extraordinary COVID-19 monetary policy package, which also included tens of billions in cheap funding to lenders.
As a result, fixed-term home loan rates, in particular, have plummeted to all-time lows, with some lenders offering fixed rates of below 2 per cent.
The RBA is now expected by most professional forecasters to cut rates again on Tuesday to 0.1 per cent, with talk they could also begin a large-scale monetary intervention, known as quantitative easing, or QE, aimed at pushing longer-term bond rates down.
While of little direct benefit in lowering the cost of financing across the economy, RBA officials have flagged that squashing longer-term rates by buying bonds would put downward pressure on the Australian dollar.
But economists are increasingly concerned that cheaper money has done little to promote economic growth and has come at the cost of surging asset prices.
Savers, in particular, have suffered a devastating erosion in what they can earn on their deposits at time when the household savings rate has soared to record highs.
Exclusive research from RateCity shows that the interest paid on a $400,000 term deposit has more than halved since February, while the repayment on an equivalent-sized mortgage has dropped by under 10 per cent.
Six-month deposit rates offered by major banks have dropped from 1.56 per cent pre-pandemic to 0.73 per cent. In terms of monthly interest earned, that was the equivalent of a fall from $521 to $242.
In contrast, the average variable mortgage rate among the big four banks has fallen from 3.57 per cent to 3.28 per cent, shaving the monthly repayment on a $400,000 mortgage from $1190 before the crisis, to $1093.
UTS professor Warren Hogan, a former chief economist at ANZ, said it was “hilarious” that the central bank appeared determined to keep lowering rates.
While the official cash rate target is 0.25 per cent, the actual rate in recent weeks has settled at about 0.13 per cent. Professor Hogan said it would not trade at lower than about 0.06 per cent even after a possible cut on Tuesday, meaning the RBA on Tuesday would actually only deliver an effective cut of about 0.07 percentage points.
“It’s the height of craziness,” Professor Hogan said. “I think it’s meaningless.”
The Reserve Bank has been the subject of unusually high-profile criticism in recent months, including from former prime minister Paul Keating, who accused the central bank of being too timid by not easing aggressively enough through the crisis.
Former RBA board member ANU economics professor Warwick McKibbin said that cutting rates further would hurt savers.
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