Interest rates remain on hold and are likely to stay low for years to come

Rates have remained at this level since March, when the country was going through the worst effects of the coronavirus pandemic.

Despite the low rates, Australians remain cautious in their spending: grocery purchases up, however the country’s services sector is caught in recession territory.

The decision wasn’t unexpected, with RBA Governor Philip Lowe previously suggesting rates will remain low for year to come.

In June Mr Lowe, stated, “I think it's likely we're going to see interest rates at their current level for years.”

“We do face a world where there'll be a shadow from the virus for quite a few years. People will be more risk-averse, they won't want to borrow, in Australia we're going to have lower population dynamics.”

So serious is this recession that it is seen as the largest economic contraction since the 1930s.

Mr Lowe stated in his July announcement that Australia was going through a “very difficult period”.

Interestingly, there is some contrarian thought to the way interest rates will go in the near to long term.

Griffith University’s Tony Makin expects a rise in interest rates this year.

“If the virus is satisfactorily contained, and assuming no second wave, the economy should be recovering by the December quarter,” Makin said.

“In the context of a domestic and global recovery, the high money growth stemming from public debt monetisation should put upward pressure on the price level, necessitating a monetary policy response.”

Conditions not as bad as first thought

While still dire, economic conditions have stabilised across the country with the downturn less severe than initially feared.

“While total hours worked in Australia continued to decline in May, the decline was considerably smaller than in April and less than previously thought likely,” Mr Lowe said.

“There has also been a pick-up in retail spending in response to the decline in infections and the easing of restrictions in most of the country.”

A full lockdown in Victoria could worsen the situation as a second wave spreads through the state. We will have to wait to see what the economic impact of this turn of events will be.

The situation in Victoria could affect the speed of the recovery, which Mr Lowe said is “highly uncertain”.

“Uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans.

“The pandemic is also prompting many firms to reconsider their business models. As some businesses rehire workers as demand returns, others are restructuring their operations.”

Worst global contraction may have also passed

Mr Lowe said the nation's top economists were closely watching the performance of the global economy, with economic signposts helping to gauge the health of the economy.

“The global economy has experienced a severe downturn as countries seek to contain the coronavirus.

“Many people have lost their jobs and there has been a sharp rise in unemployment. Leading indicators have generally picked up recently, suggesting the worst of the global economic contraction has now passed.

“Despite this, the outlook remains uncertain and the recovery is expected to be bumpy and will depend upon containment of the coronavirus.

“Over the past month, infection rates have declined in many countries, but they are still very high and rising in others.”

Whether or not the economy contracts further, or improves, the RBA is continuing to take a wait and see approach.

With the Mr Lowe calling for economic stimulus in this country, we can reasonably expect rates to remain on hold for some time.

This update is not financial advice. This article is general news and information.

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