Tuesday, October 20, 2020
Business

RBA Governor encourages spending, says cash rate will not rise for 3 years

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Governor of the Reserve Bank of Australia (RBA), Dr Philip Lowe, made a speech this morning encouraging Australians to spend more money to assist the stimulation of the economy. The speech addressing the annual Citi Australian and New Zealand investment conference also outlined the RBA’s plans to raise the cash rate, saying it will not go up for at least three years.

Dr Lowe outlined the spending habits of households and businesses, explaining that the best outcome for the economy would be for people to spend more.

“[Initially] Australians were more cautious and had fewer opportunities to spend, given that many services were simply unable to be offered,” he said. 

“As these opportunities disappeared, households did adjust their spending patterns, spending more on electronics and exercise equipment and online. But this substitution was not enough to offset the very large drop in spending on services and there was a record decline in consumption in the June quarter.”

The latest RBA data shows that household savings have surged 20 per cent, the highest in half a century during the COVID-19 recession.

While this data shows that Australian household will have more money to cushion economic hardship, this poses issues for the stimulation of the economy out of the recession.

Dr Lowe called on Australian businesses and households to “draw on the accumulated financial buffers” and inject them back into the economy. 

“Many businesses face a similar choice to households. Many have boosted their cash buffers over the past six months and face a decision about what to do with these: sit on these buffers in case something goes wrong, or use them for investment and expansion?

The better outcome for the economy is for households and businesses to keep spending and investing.”

It is understood that small businesses in particular are keen to keep hold of subsidies coming their way as a sector that has been hit hard by the recession.

ABS data shows that the number of payrolls jobs are down 7 per cent for small and medium businesses compared to just 1 per cent for larger enterprises. 

In his speech, Dr Lowe also revealed that the central band would not be increasing the cash rate for at least three years, until actual inflation was sustainably within the two to three per cent range. 

“It is not enough for inflation to be forecast to be in the target range,” he said. 

“On our current outlook for the economy — which we will update in early November — this is still some years away. So we do not expect to be increasing the cash rate for at least three years.”


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