The Reserve Bank cuts cash rate to historic low of 0.25%

The Reserve Bank of Australia (RBA) is firing off what little ammunition it has left in its economic war chest in the fight against coronavirus - cutting the interest rate by 25 basis points to a further historic low of 0.25%.

Governor Lowe says the major disruption caused by COVID-19 will "remain the case for some time."

"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."

The rate cut has been accompanied by some quantitative easing (QE) measures including: setting the target yield on 3-year Australian Government bonds to around 0.25 per cent through the purchase of government bonds and semi-government securities; and providing a fixed funding facility to lenders, provided they use it to increase lending to small and medium-sized businesses.

Lowe says the rate cut and QE measures "will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery."

On a more optimistic note, Lowe reinforced that Australia's financial system is "resilient and well placed to deal with the effects of the coronavirus."

"The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy."

So, where to from here?

It could, theoretically, drop another quarter per cent to take the rate to zero. Of course, this is as far as it can go before dipping into negative interest rate territory, a la Japan, where you'd be charged for keeping money in the bank. But this almost certainly won't happen; the RBA has previously indicated that 0.25% is the effective lower bound.

Aside from pumping liquidity into the economy through QE, the only other thing it could do to calm markets is extend its forward guidance by promising to keep rates low for a long time.

Barring the above measures, it's now up to the government to continue pulling the fiscal lever through spending.

"Monetary policy cannot do all the heavy lifting of supporting the economy by itself, and it is highly likely that fiscal policy will be expanded significantly in order to attempt to limit the damage caused by coronavirus containment measures," says Fidelity's Anthony Doyle.

"The Australian Federal and State governments will likely be called upon to announce further stimulatory measures, including greater industry assistance, larger wage subsidies, and cash-flow support for households and businesses."

Banks on board

Commonwealth bank has reduced the fixed rates on one, two and three year fixed mortgages by 70 basis points, taking that rate to 2.29%, with rates on small business loans slashed by 100 basis points. However, it will leave its standard variable rate unchanged.

Westpac announced it will decrease variable interest rates by 0.25% for home loan customers, as well as rates on small business cash-based loans and overdrafts.

More to come.

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