The Reserve Bank of Australia has cut the cash rate to a record low and says it is prepared to do more if necessary.
At its board meeting on Tuesday, the RBA agreed to slice the cash rate to just 0.1 per cent from 0.25 per cent and made similar reductions for other measures to keep market interest rates and funding costs low across the economy.
If the cash rate cut is passed on in full by the banks, the average monthly saving could be about $33 a month on a $400,000 loan for an owner occupier paying principal and interest.
The central bank has also introduced a bond buying program to keep finance costs low and the Australian dollar in check.
Such were the drastic measures, RBA governor Philip Lowe made a rare media appearance after the board meeting to explain the board's actions.
"Today's decision reflects the Reserve Bank's commitment to do what we reasonably can, with the tools that we have, to support the recovery of the Australian economy," Dr Lowe told reporters.
"The board views addressing the high rate of unemployment as a national priority and it wants to do what it can to support job creation."
Even so, the RBA now expected the unemployment rate to peak at a little below eight per cent, rather than the 10 per cent expected three months ago.
Dr Lowe also believes the economic recovery is under way in Australia and positive economic growth is now expected in the September quarter, despite the restrictions in Victoria.
The central bank also reduced its three-year bond yield target rate and its term funding facility rate for banks to 0.10 per cent from 0.25 per cent.
The new $100 billion bond buying program will be targeted at five to 10 year maturities of either Australian government or state bonds, with the first auction on Thursday. The size of the bond program will be kept under review.
Dr Lowe said the combination of the RBA's bond purchases and lower interest rates across the bond yield curve will assist the recovery by lowering financing costs for borrowers and contributing to a lower exchange rate.
The board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range.
"For this to occur, wages growth will have to be materially higher than it is currently," Dr Lowe said.
"This will require significant gains in employment and a return to a tight labour market. Given the outlook, the board is not expecting to increase the cash rate for at least three years."
He again ruled out negative interest rates as a future option, but said it was certainly possible to increase the size of bond purchases.
"If we need to do more, we can and we will," he said.
The reduction in the cash rate is the first since March this year, when it was reduced twice in the month, the second coming at a special board meeting at the onset of the pandemic.
Australian Associated Press
