The Reserve Bank of Australia has cut the official interest rate to 0.10% in its first major move since the country entered recession.
The official interest rate now is the lowest ever in Australia and follows the Reserve Bank of Australia cutting the official interest rate to 0.25% in March.
The Reserve Bank of Australia will also purchase A$100 billion in five- to 10-year government bonds over the next six months, Reserve Bank Governor Dr Philip Lowe said in a statement.
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Lowe said.
“In Australia, the economic recovery is underway and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria. It will, however, take some time to reach the pre-pandemic level of output. In the central scenario, GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022. The unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. At the end of 2022, the unemployment rate is forecast to be around 6%.”
The central bank had previously flagged it would not take interest rates lower than 0.25%, with today’s decision signalling a significant change of heart.
It’s the first rate change since Australia’s economic growth indicator, or GDP, fell 7.6% in the June quarter, marking Australia entering recession for the first time in nearly 30 years.
However, three countries have official interest rates below zero – Japan, at -0.1, and Denmark and Switzerland, at -0.75%. Bulgaria, Norway, Sweden and the Eurozone have a bank interest rate of zero.
Under a negative rate policy, financial institutions are required to pay interest for putting excess reserves with the central bank. That way, central banks penalise financial institutions for holding on to cash in the hope of prompting them to boost lending.
Apart from lowering borrowing costs, advocates of negative rates believe they help weaken a country’s currency rate by making it a less attractive investment than that of other currencies. A weaker currency gives a country’s export a competitive advantage and boosts inflation by pushing up import costs.
China, the only country with a positive GDP in the second quarter, has an interest rate of 4.20%.
FAQs
However, three countries have official interest rates below zero – Japan, at -0.1, and Denmark and Switzerland, at -0.75%.
Which country has a 0 interest rate? ›
As of September 2024, there are no central banks with negative interest rates. Three countries that had instituted negative interest rates, Switzerland, Denmark, and Japan, have since rescinded.
How does zero interest rates affect the economy? ›
A zero interest rate policy (ZIRP) occurs when a central bank sets its target short-term interest rate at or close to 0%. The goal of ZIRP is to spur economic activity by encouraging low-cost borrowing and greater access to cheap credit by firms and individuals.
Do people spend more when interest rates are low? ›
Lower interest rates encourage big purchases by consumers and expansion by businesses.
What is the problem with 0 interest rates? ›
You usually need a very high credit score to qualify for zero interest loans. Zero interest car loans usually come with a higher price tag, expensive extras and strict repayment terms. If you miss even one payment, you lose your 0% interest rate and get charged late fees.
Why is Japan's interest rate 0? ›
The rates went back to near-zero levels again after the Global Financial Crisis. “The saga of ultra-low interest rates in Japan reflects the fact that the Japanese economy suffered from secular stagnation and also from mild but persistent deflation for the past 20 years.
What countries have the lowest interest rates? ›
With average lending interest rates of less than three percent in 2023, Switzerland was the country with the lowest cost of borrowing money among the ones selected here. The average lending interest rate in China was 4.35 percent, and in South Korea it was roughly 5.2 percent.
Is zero interest rate good or bad? ›
Key takeaways
A 0 percent intro annual percentage rate (APR) card can help you consolidate and pay down debt faster – without interest payments – if you're disciplined in how you use it. These cards typically come with a balance transfer fee, and you risk losing the 0 percent intro APR if you're late with a payment.
What will happen if the interest rate is zero? ›
If interest rates reach zero percent, it limits the central bank's ability to stimulate the economy through conventional monetary policy, as there's little room to lower rates further.
What happens when interest rates fall to zero? ›
When interest rates are low, it's easier for people to borrow money, and when they go up, it becomes harder. During the period of near-zero rates, consumers benefited from lower mortgage, credit card and auto loan rates.
Like anything else, there are always two sides to every coin—low interest rates can be both a boon and a curse to those affected. In general, savers and lenders will tend to lose out while borrowers and investors benefit from low interest rates.
Who benefits from interest rates being high? ›
Financials First. The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.
Do low interest rates help the economy? ›
These lower loan rates can help stimulate economic growth in a couple ways. First, they can make it cheaper for people and businesses to borrow money for big purchases or new ventures. Secondly, banks also typically lower rates on CDs and savings accounts, which makes it less profitable to keep money in bank accounts.
What is the zero interest rate problem? ›
The zero lower bound problem refers to a situation in which the short-term nominal interest rate is zero, or just above zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth.
Why should you avoid 0% interest? ›
Avoiding interest is always a good goal, but zero-interest loans can lead buyers to overspend and come with a lot of strings attached. Carefully evaluate your purchase—is this what you intended to buy, and will you realistically pay off the loan within the given time?
Can interest rates be below zero? ›
Unfortunately, nominal interest rates can't be pushed much below 0, due to the famous Zero Lower Bound, an example of what Keynes called a liquidity trap. To be sure, it had turned out in Europe and Japan that nominal interest rates could be pushed a bit below zero: as low as negative 0.5%.
Can you get a 0 percent interest rate? ›
Some issuers offer a 0 percent APR on new purchases for a limited amount of time as an incentive to sign up for a credit card. For example, some of the best zero-interest APR cards come with a 0 percent APR on new purchases for the first 15 months.
What is China's interest rate? ›
China Loan Prime Rate is at 3.35%, compared to 3.35% last month and 3.45% last year. This is lower than the long term average of 3.74%.
Can you get 0 percent interest? ›
Some lenders may offer a 0% promotional period on a loan, meaning you won't pay interest for a set number of months. But you'll always end up paying interest before your loan is paid off. However, lenders do offer other types of interest-free credit.
Has the interest rate ever been zero? ›
Zero interest-rate policy (ZIRP) is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary Japan and in the United States from December 2008 through December 2015 and again from March 2020 until March 2022 amid the COVID-19 pandemic.
