Home > Reduced Borrowing Costs to Help the Australian Economy

Reduced Borrowing Costs to Help the Australian Economy

June 16, 2020 By Mircea Vasiu

The coronavirus pandemic ended the 30+ years long Australian economic expansion. For the first time in decades, 2020 brings recessionary conditions in Australia and new challenges for the Reserve Bank of Australia (RBA). 

As a result of the ongoing economic growth, many would be inclined to think that the RBA does not know how to handle a recession – after all, most of its members did not witness one before, while in official positions. Yet, the RBA is an accommodative stance for quite some time now – long before the coronavirus pandemic.

A Proactive RBA Helps the Australian Economic Recovery

 

One of the RBA’s major accomplishments during the coronavirus pandemic was to reduce borrowing costs across the economy. This helped businesses particularly, as lending rates fell sharply, sometimes even more than the cash rate itself. As a consequence, the Australian economy is in a better position to control the damage from the coronavirus pandemic.

Speaking of the Australian economy, this is one of the most important economies in the Asia-Pacific region.  Australia has a special trade relationship with China, in the sense that a lot of its output goes to China, in particular raw materials and natural resources.

The pandemic affected the Chinese economy and, indirectly, the Australian one. For decades, the Australian GDP has hovered between 2% and 4% quarterly growth, mounting to one of the longest economic expansions a developed economy ever had.

It all ended abruptly, but the RBA did a great job of being prepared ahead of the crisis. Worried about a possible housing bubble, the RBA lowered the cash rate systematically over the years – pushing it even below the Federal Reserve funds rate for a while.

The exchange rate quickly adjusted, as the AUDUSD traded lower for as long as the Fed hiked the rates, and the RBA kept the cash rate on a downward path. Now that the coronavirus health crisis became a global phenomenon and the Fed loosened up its policy too, the AUDUSD pair bounced as investors bet on a faster recovery in the Asia-Pacific area due to the time lag (Asian economies reopened faster).

For a better understanding of Australia’s role in the region, think of the fact that 31% of its exports go to China, 13% to Japan, 6% to Korea, and another 5% to India. The European Union, for instance, only accounts for 7% of Australian exports.

The Asia-Pacific region is expected to be the first one to rebound. If that is the case, Australia is well-positioned thanks to the RBA’s proactive stance.