Unprecedented. That word is getting a lot of air time in the media of late, as governments and monetary policymakers around the world scramble to minimise and contain the financial fallout of Coronavirus.
In its first counter-cyclical move on interest rates since 1997, the Reserve Bank last week announced that it would cut the official cash rate from 0.50 per cent to 0.25 per cent, in an attempt to shield the economy from a dire future forecast, for local business and employment.
Every day, Australians are waking up to a new and constantly changing world, where retail, hospitality, sporting and entertainment industries are being shut down, and the long-term supply of income and basic needs is increasingly uncertain.
Last Thursday, Governor Phillip Lowe warned this would be a long journey through the unknown, that has the potential to inflict permanent damage on our everyday lives and the economic stability of our country.
“We are expecting a major hit to economic activity and incomes in Australia that will last for a number of months,” he said. “We are also expecting significant job losses.”
Indeed, we are already witnessing a catastrophic fallout, with hundreds of businesses forced to indefinitely close their doors overnight and Orwellian type scenes on our TV screens, as cues for government assistance spilled out of Centrelink offices and into the surrounding streets.
Lowe said the scale of job and economic losses will be determined by the ability of employers to retain workers “during this difficult period.”
He assured the nation that the RBA will hold the cash rate steady at 0.25 per cent “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2 to 3 per cent target band.”
Pulling out all the stops to throw every possible bit of economic stimulus at the most challenging financial situation we’ve experienced in our lifetime, the central bank is also targeting the interest rate on Australian government three year bonds at 0.25 per cent, commencing a strategic acquisition of bonds in the secondary market as of last Friday.
“The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium sized businesses,” according to Lowe.
Unconventional times call for unconventional measures
Last week’s announcement of an out of cycle rate cut, the buying of government bonds, and low interest lines of credit for financial institutions to continue lending to small and medium sized businesses, are a move toward “quantitative easing” by the central bank.
Otherwise known as “unconventional monetary policy,” intended to protect the wider economy from the mounting financial devastation of this global pandemic.
While a few, well planned interest rate cuts are normally sufficient to stimulate employment and wage growth, sending inflation figures on an upward trajectory, times are changing at breakneck speed; and standard rate cuts are nowhere near enough to breathe life into our ailing economy at this point.
The economy was already growing well below trend, long before COVID-19 made its dramatic entrance onto the world stage, with close to 2 million Aussies out of work or seeking more hours and a long term stalling of wage growth, when the official cash rate was still at 1 per cent.
And now, as the RBA faces the very real possibility of reducing interest rates into negative territory in the very near future, it’s had little choice but to deploy these “unconventional monetary policies”, in a bid to affect an easing of the mounting pressure on our local economy and businesses.
Quantitative easing measures were introduced across the United States and parts of Europe, during the 2008 Global Financial Crisis.
Essentially, it involves the Central Bank printing money that it then uses to buy government bonds, which are debts issued by the government.
Historically, government bonds have been considered the safest form of investment, because, well…unlike privately owned companies, governments don’t tend to go bankrupt.
As at this month, the federal government was said to owe around $550 billion to investors who’ve bought Australian bonds over the years.
Now, the RBA intends to buy as many government bonds as possible, hoping to cause a surge in demand and reduce the applicable interest rate on them to such a low level that the banks are better off lending money to businesses and households, rather than hanging onto it.
In other words, the central bank has no choice now but to spend large quantities of new cash to ease monetary policy, as well as printing additional money for the federal government’s coffers, to help fund its planned $66 billion coronavirus stimulus package.
The economic tipping point
The RBA has been forced to “go hard or go home” with its latest monetary policymaking for three main reasons.
Firstly, our inflation figures have been trending well below the targeted 2 to 3 per cent for years now. Secondly, prior to the global COVID-19 outbreak, economic storm clouds were already blanketing central banks around the world, and finally, its running out of interest rate ammunition.
The Coronavirus represents an economic existential threat that’s forcing the central bank to be increasingly innovative.
With the economic impact spreading just as virulently and aggressively across world financial markets as the disease itself is spreading through populations, it’s difficult to know where and when it will end.
All we can do is watch and wait as governments and policymakers throw a veritable avalanche of money at the problem, and do our darnedest to ride out the storm, surveying what’s left in its wake when this tsunami of uncertainty finally clears.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).