No one will be surprised that the Reserve Bank of Australia (RBA) left interest rates unchanged at a record low of 0.25% today. But there are three things that every investor should know.
Before I get into that, it’s worth pointing out that the S&P/ASX 200 Index (Index:^AXJO) failed to react to the news as it continued to hover around breakeven.
But the Australian dollar ticked up slightly to US67.9 cents when the RBA released its monetary policy decision.
Currency traders are probably reacting to the relatively upbeat statement by RBA governor Philip Lowe and reassessing the prospects for negative interest rates.
Sounding upbeat
On the first point, the Governor Lowe is taking a glass half full perspective on the COVID-19 fallout.
While highlighting that we are suffering from the worst economic contraction since the Great Depression of the 1930s and that total hours worked dropped by a record 9% in April as 600,000 Australians lost their jobs, he thinks the downturn won’t be as bad as earlier expected.
The RBA also believes that bond markets are functioning well. So well in fact, that the central bank only had to buy government bonds once in the past month and that total purchases up to date stands at $50 billion.
Negative to negative rates
The second thing to note is that the market may be over estimating the chance of negative interest rates here.
Some believe that the RBA will have to adopt this drastic policy of charging financial institutions to park money with the central bank. Other central banks, like its European counterpart, have used this to stimulate their sagging economies.
Negative rates aren’t so much about lowering borrowing costs for businesses and consumers, but about “incentivising” nervous financial institutions to lend by penalising them for being too cashed up.
Dr Lowe played down the chances of negative rates here on a few occasions, and his statement seems to confirm this even though it didn’t mention negative rates.
Passing the buck to government
For one, his comments on how well bond markets are working suggest that the financial system is working as it should be.
The RBA’s relatively upbeat view on the economy further drives home the point with our central bankers looking to manage the economy with a light touch, in my view.
The RBA doesn’t look like it will be doing much in the interim as it is prepared to sit back to see what happens next.
This could put the federal government under more pressure to support the economy with the Morrison Government tipped to announce housing grants and other fiscal measures to support sectors of the economy that are on their knees.
Don’t feel abandoned
This takes me to the final takeaway from the RBA’s decision. While RBA may be taking a step back, it’s reassuring investors and borrowers that it stands ready to act if and when required.
No one knows how the unprecedented coronavirus crisis will play out, not even the central bank, but as Dr Lowe said: “the Bank is prepared to scale-up its bond purchases again and will do whatever is necessary to ensure bond markets remain functional.”
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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