What you need to know about the RBA’s rate decision today

The Reserve Bank of Australia (RBA) signaled that the good times will continue to roll on for borrowers at the expense of savers.

Our central bank held the official cash rate and three-year government bond yield target steady at 0.25%, but expanded its term funding facility.

The S&P/ASX 200 Index (Index:^AXJO) and the Australian dollar was largely unmoved by the news, which all but guarantees record low rates for loans and savings accounts.

Low interest rates for everyone

The term funding facility (TFF) gives authorised deposit-taking institutions (ADIs), which includes banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), access to cheap funds.

The TFF was meant to expire in September but the RBA extended this to the end of June 2021 and increased the size of the facility to $200 billion.

ADIs can tap the TFF for three-year loans at up to 2% of their outstanding credit and only pay 0.25% interest to fund their loan book. To date, ADIs have drawn down $52 billion with the RBA expecting banks to make further drawings over the coming weeks.

Debt to keep economy afloat

“This will help keep interest rates low for borrowers and support the provision of credit by providing ADIs greater confidence about continued access to low-cost funding,” said RBA Governor Philip Lowe.

“The Term Funding Facility and the other elements of the Bank’s mid-March package are helping to support the Australian economy.

“There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows.”

It’s a demand, not supply issue

But access to cheap debt isn’t really the issue. The main problem is poor demand for debt due to rising unemployment amid the COVID-19 recession. Those with no jobs or job security won’t be in the mood to borrow.

Throw in the stricter lending criteria imposed by the banks because of the weakening economy, and the limits to the RBA’s monetary prowess becomes painfully apparent.

The most desperate borrower in Australia

The only ones that’re desperately in need to borrow are the state and federal governments as they are forced to spend big to support our struggling economy.

Thankfully, governments aren’t having any issue on this front. The market showing no indigestion issues even as government debt issuances surge and the RBA stands ready to be the lender of last resort.

“Over the past month, the Bank bought a further $10 billion of Australian Government Securities (AGS) in support of its 3-year yield target of 25 basis points,” added Dr Lowe. “Since March, the Bank has bought a total of $61 billion of government securities.”

Lower for longer

But with all the twists and turns in the path to COVID recovery, particularly for Victoria, the RBA reassured the market that it will provide support for as long as necessary.

In other words, interest rates here won’t be going up for a long while. Good news for those who are willing and able to borrow.

More reading

• 3 ASX blue-chip shares I would buy at today’s prices
• How the rising Aussie dollar could drive the Carsales share price to new all-time highs
• Revealed: Risk-reward myth shattered
• What do you do after record share price gains?
• Here’s why the Telstra share price fell 15% in August

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

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.

The post What you need to know about the RBA’s rate decision today appeared first on Motley Fool Australia.

from Motley Fool Australia https://ift.tt/2YRnKM5