Australian Central Bank Cuts Key Interest Rate to 0.1%

CANBERRA, Australia (AP) -- Australia's central bank on Tuesday cut its benchmark interest rate by 0.15 of a percentage point to a record low 0.10% in a bid to lift the economy from a pandemic-induced recession.

The move was the first since March when the Reserve Bank of Australia board made two cuts of a quarter of a percentage point each two weeks apart.

The Reserve Bank also announced it would buy 100 billion Australian ($70 billion) of government bonds of maturities of around five-to-10 years over the next six months.

The bank is prepared to buy bonds in whatever quantity is required to achieve a 3-year yield target of 0.1%, Reserve Bank governor Philip Lowe said in a statement.

“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Lowe said.

Recent economic data have been better than expected and the near-term outlook was better than it was three months ago, he said.

“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus,” he added.

The board said the global economy had been recovering from the initial virus outbreaks, with the recovery most advanced in China.

Output in most countries remains well short of pre-pandemic levels and recent virus outbreaks pose a downside risk to the outlook, particularly in Europe, Lowe said.

Most major economies have slashed interest rates to near record low levels and deployed massive central bank stimulus to help their economies weather the coronavirus pandemic.

The Australian economy contracted during the first half of the calendar year, although Lowe said the economy had “increased solidly” during the September quarter. Official data for the quarter have yet to be released.

Treasurer Josh Frydenberg said the interest rate cut plus the bank's bond yield target complemented his government's AU$507 billion ($357 billion) commitment in pandemic support to the economy.

“We're seeing some positive signs as jobs are coming back and restrictions are eased,” Frydenberg told reporters. “But it will be a long, hard and bumpy road for the Australian economy and, indeed, for the global economy.”

St. George Banking Group Chief Economist Hans Kunnen said the bank's intervention would help create jobs, give borrowers greater confidence and keep the Australian currency competitive for exporters.

“The board is very conscious of the high levels of unemployment and something needs to be done,” Kunnen said. “We're in the deepest recession that we've had since the '30s.”

Expanding the bank's investment from three-year government bonds to five and 10-year bonds eases borrower fears of interest rates climbing again.

“It adds certainty to borrowing, not only reducing rates, saying you can now lock in these exceptionally, historically low levels for up to 10 years which is very attractive for borrowers,” Kunnen said.

The Australian economy was beginning to recover especially since the nation's second-largest city, Melbourne, emerged last week from a 111-day lockdown.

Australia on Sunday recorded its first day without a single-case of COVID-19 community transmission since June 9.

The bank expects the economy will grow by 6% in the current fiscal year through June 2021 and 4% in the following year.

It also has forecast that Australia's jobless rate will peak at less than 8%, down from 10% estimated three months ago.

Inflation is expected to be 1% in 2021 and 1.5% in 2022.

Lowe said the bank would not lift its benchmark cash interest rate until inflation reaches its target band of between 2% and 3%.

“For this to occur, wages growth will have to be materially higher than it is currently," Lowe said. “This will require significant gains in employment and a return to a tight labor market. Given the outlook, the board is not expecting to increase the cash rate for at least three years."

He later told reporters that interest rates had been cut “as far as it makes sense to do so in the current environment.” Japan and the European Central Bank have taken their own benchmark rates into negative territory.

Lowe described a negative interest rate as “extraordinarily unlikely.”