While Stevens and his RBA could see threats of inflation and wages breakout in every shadow, Lowe and his team are pushing back calls from some quarters to take official interest rates into negative territory.
During his press conference, Lowe said he was optimistic but that optimism includes the prospect of zero interest rates for at least another three years.
“I would hope that we’re not permanently in this world of zero interest rates,” he said.
Just as the COVID-19 outbreak has forced people to rethink their approach to personal space, hygiene and travel, the Reserve Bank has been reconsidering its place in the economic world.
And that reconsideration was most clear in explaining the package of measures it endorsed this week.
For mortgage holders and savers, the most important decision was the 0.15-percentage-point cut to the official cash rate, which as of Tuesday fell to a record low of 0.1 per cent. On a $300,000 mortgage, if your bank passed on the cut in full it would be worth about $23 a month.
While many small lending institutions passed on the cut, the big four banks focused on their fixed-term mortgage rates. Some are now below 2 per cent.
Savings rates on deposits are already at rock bottom and will now fall even further.
Apart from cutting the official cash rate, the bank reduced to 0.1 per cent the interest rate on the $200 billion line of credit available to commercial banks to on-lend to small and medium-sized businesses. So far this year, $83 billion has been snapped up by banks.
The RBA normally pays interest to commercial banks that leave money with it overnight. But not any more, with the rate on so-called exchange settlement balances taken to zero.
Since March, the RBA has been actively attempting to ensure the interest rate on government debt is no more than 0.25 per cent. It has done this by buying around $62 billion worth of three-year government bonds from private investors.
This week it committed to buy more of these bonds to bring their interest rate down to 0.1 per cent.
The biggest element of the package was the commitment to spend $100 billion over the next six months buying federal and state government bonds of between five and 10 years’ duration. Purchases started on Thursday, with the bank picking up $5 billion worth of government debt.
When interest rates were lifted in 2010, the bank’s stated aim was to keep a lid on inflation. The target band of 2-3 per cent is a cornerstone of the RBA’s economic management.
But this week, Lowe stressed the RBA’s focus was now on the jobs market. He said as the economy recovered from the recession, the country faced the prospect of “a long period of higher unemployment and under-employment than we have become used to”.
“Unemployment is a major economic and social problem that damages the fabric of our
society. So, it is important that it is addressed,” he said.
The problem, recognised by the bank, is that it is really a bit player when it comes to creating jobs.
The heavy lifting has to be done through government policy and businesses – supported by free-spending consumers – willing to expand and put on extra staff.
Lowe says the economy will only really start recovering once the appetite to invest, the preparedness to take a risk, returns.
“I’m confident that some time in the next five years these fundamentals will reassert themselves,” he said. “I don’t think it’s a forlorn hope, I think it’s quite realistic.”
But for all the cheap money from the RBA and the spending by the Morrison government, the only real magic bullet at this stage is a medical breakthrough. Be it via a vaccine or the simple disappearance of COVID-19, the economy’s prospects are tied to global health outcomes.
And that’s before the bank and the government get to dealing with the issues left in the pandemic’s wake. These include the huge holdings of debt by the Reserve Bank, the run-up in debt held by the nation’s households and how or when interest rates are ever going to return to some sort of normal.
In 2010, a cash rate of 4.75 per cent was considered around normal. It’s hard to imagine the Reserve Bank finding that mark any time over the next decade.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.