RBA announces February cash rate decision

The expectations were formed after the RBA decided to cut the cash rate to the record low in November 2020, and governor Philip Lowe revealed that the RBA did not expect to increase the cash rate for at least three years, or at least until there is a lower rate of unemployment and a return to a “tight” labour market.

After deciding to hold the official cash rate at 0.10 per cent in December, Mr Lowe re-emphasised that the board would not increase the cash rate until actual inflation had reached its target range.

As such, the RBA has announced in its first rate call for 2021 that it has decided to hold the rate at current levels.

In a statement explaining the RBA’s first cash rate decision for this year, Mr Lowe reiterated that the central bank board would not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest,” Mr Lowe said.

“The board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off.

“The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets.”

Mr Lowe said the RBA has also decided to purchase an additional $100 billion of bonds issued by the federal government and states and territories when the current bond purchase program is completed in mid-April. 

These additional purchases will be at the current rate of $5 billion a week, he added.

Last year, the RBA commenced QE by purchasing government bonds on the secondary market after making an emergency out-of-cycle cash rate cut to 0.25 per cent in March 2020 in response to the economic fallout from the coronavirus pandemic. It also launched a multibillion-dollar term funding facility (TFF) to maintain the flow of credit to SMEs.

To date, authorised deposit-taking institutions have drawn $86 billion under the TFF and have access to a further $99 billion.

Commenting on the RBA’s rate decision, Finsure managing director John Kolenda said that the windback of the federal government’s COVID-19 economic stimulus would “weigh heavily” on future RBA interest rate decisions.

However, he added that the central bank would continue to keep the cash rate at current levels to assess economic data over at least the next two quarters.

“The RBA will wait to see the fallout from the scheduled finish of measures such as JobKeeper at the end of March,” Mr Kolenda said.

“They will assess the impact to small-business operators and property owners facing possible hardship when support finishes. The stimulus packages, which have enabled businesses impacted by COVID to receive subsidies from the federal government to continue paying their employees, has been a great success.

“Without JobKeeper and other measures, the unemployment rate could have been well over 10 per cent. But the latest figures for December 2020 show the nation’s unemployment rate had dropped to 6.6 per cent as 30,000 more Australians found work in the wake of the pandemic.”

Mr Kolenda has anticipated that the outlook for the cash rate would be clearer after the June quarter this year.

“It’s unlikely the cash rate will be going any lower, and any future steps by the RBA might be an increase, but that could still be a long way off,” he said.

“The RBA will be closely monitoring the economic data focused on unemployment, property prices and consumer spending. If these three areas all show a rebound, then we will certainly see rates rise.”

Loan Market Group executive director of network success Andrea McNaughton said the RBA’s decision to hold interest rates “is no surprise”, and has predicted that rates would hold steady for some time.

“The RBA has said the official cash rate will remain low for the foreseeable future, and we agree that’s the right move. Instead, I anticipate that the government may look at other macroprudential measures to keep a balance on the property market, maintaining housing affordability while ensuring consumer confidence grows,” Ms McNaughton said. 

“It will be a fine balancing act.”

Ms McNaughton noted that market confidence has continued to rise, while broker lodgements have also increased.

“Real estate auctions this weekend (9 February) are up 11 per cent compared to the same weekend last year across Australia. We saw borrower activity lift in the last quarter of 2020 and now that we’ve come out of the holiday season, we’ll see these pre-approved customers bid at auctions and table offers on properties around the country,” she concluded.

Susan Mitchell, CEO of major brokerage Mortgage Choice, said the RBA’s decision to hold the cash rate in its first rate announcement for 2021 has followed a “raft of economic data”.

“The housing market continues to show strong demand. Data published this week revealed that 2020 ended with record home loan demand, and strong activity in the housing market is driving values further up,” she said.

“Constrained supply continued to fuel a rise in house prices in January. According to CoreLogic’s Hedonic Home Value Index, national dwelling values rose 0.9 per cent over the month, supported by a rise in every capital city. Remarkably, the index showed that housing values have surpassed pre-COVID levels and the index is higher than the previous September 2017 peak.

“Data from the Australian Bureau of Statistics (ABS) suggests the momentum is set to continue in the housing market. Housing finance data revealed December approvals jumped 8.6 per cent and were up 31.2 per cent on the year prior. Owner-occupiers and, more specifically, first-time buyers fuelled demand for home loans in December.”

ABS data has also revealed a 0.9 per cent lift in the December quarter consumer price index, driven by a surge in housing demand, and an uptick in the unemployment rate. However, the employment gains were mostly for part-time work, Ms Mitchell pointed out.

“As the Australian economy continues to strengthen and interest rates remain at record lows, the outlook for activity in the housing market remains strong. For those in a position to buy their first home, or upgrade their family home, now is a great time to lock in historic low interest rates,” she said.

[Related: RBA makes final cash rate call of the year]