RBA delivers first rate decision for FY21-22

However, the RBA has not changed its stance on possible rate rises before 2024, with RBA governor Philip Lowe saying in his statement on the monetary policy decision: “The board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.

“It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The bank’s central scenario for the economy is that this condition will not be met before 2024.”

In its July monetary policy decision statement, the RBA board also announced that it has decided to:

• Retain the April 2024 bond as the bond for the yield target and retain the target of 10 bps;
• Continue purchasing government bonds but at a reduced amount after completing the current bond purchase; and program in early September. These purchases will be wound back to a rate of $4 billion a week until at least mid-November (down from a pace of around $5 billion a week).

In addition, Dr Lowe said that it will be monitoring trends in housing borrowing “carefully” in an environment of rising housing prices and low interest rates.

“It is important that lending standards are maintained,” he said, while noting the strong demand from owner-occupiers, including first home buyers (FHB), and increased borrowing by investors.

In the lead-up to the decision, AMP Capital chief economist Dr Shane Oliver had predicted earlier this week that the RBA would remain relatively “dovish” amid the ongoing threat posed by lockdowns and the COVID-19 crisis.

“While we expect it to stick to the April 2024 bond for its yield target and announce some tapering of its bond buying, it’s likely to reiterate that rate hikes remain a long way off,” Dr Oliver had stated.

The RBA cut the official cash rate to the record low of 0.10 per cent in November 2020, and simultaneously moved to broad quantitative easing.

The RBA board’s decision and comments have come amid market speculation that the central bank may increase the official cash rate before the RBA’s long-term deadline of 2024.

A survey of the property industry by ANZ and the Property Council found that 30 per cent of respondents are expecting the cash rate to rise over the next 12 months, while a HashChing survey revealed that over 55 per cent of brokers felt that a rate hike was likely in 2021.

Several lenders, including ANZ, the Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB), Westpac, and ING, have increased their longer-term fixed mortgage rates, with some citing the need to manage pricing changes in a sustainable manner, while others attributed the increase to higher funding costs for longer-dated loans.

The rate rises have come amid the expiry of the RBA’s term funding facility (TFF) on 30 June, with lenders anticipating a rise in funding costs over the next few years.

In its July monetary policy statement, Dr Lowe said that the final drawdowns under the TFF were made in late June, with $188 billion drawn down, which he said has contributed to the banking system being highly liquid.

The RBA launched the $90-billion TFF for the banking system in March 2020 amid the onset of the coronavirus pandemic in Australia. The facility was aimed at supporting the flow of credit to small-to-medium enterprises (SME) by providing authorised deposit-taking institutions (ADI) with three-year funding facilities at a fixed rate of 0.25 per cent.

The facility has been providing low-cost fixed rate funding for ADIs for three years, with the RBA stating that it would continue to support low borrowing costs until mid-2024.

However, Finsure Group managing director John Kolenda assuaged consumer fears about future interest rate rises despite ongoing speculation about when the RBA might move on rates.

Commenting on the RBA’s July rates decision, Mr Kolenda said that any future RBA rate increases are unlikely to be significant as the economy has continued to remain fragile amid the ongoing COVID-19 crisis and new outbreaks.

He added that while lenders such as CBA have predicted that the cash rate could rise before the end of 2022, it is likely that if this would occur, it would do so in small increments, while the RBA would exercise extreme caution about its potential impacts on consumer confidence and the economy.

He said: “We know historically when we have rate rises that the economy slows down, and consumers tighten their belts. While rate reductions help improve consumer confidence and increase spending, rate rises have the opposite effect. This time around we are more likely to see a small increase and a long-term low interest rate environment continue.

“Mortgage-holders should always be prepared for a rise in interest rates, including increases by lenders independently of RBA decisions, but I don’t think there’s any need for people to panic about big rate rises in the current economic climate.”

Furthermore, Mr Kolenda said that it is likely for regulators to intervene should property prices continue to spike over the short-term in order to “balance the needs of the broader economy”.

Alan Hemmings, CEO of homeloanexperts.com.au, noted that the RBA’s decision to hold rates was unsurprising despite green shoots in wage growth and a resilient economy during COVID-19 even with ongoing lockdowns.

He said: “Property prices are still growing at a very fast pace, and although inflation is below the sustainable 2.00 per cent to 3.00 per cent target zone, speculation is building around when the RBA will finally make the call.

“Even if the central bank holds off on increasing interest rates until 2023-24, there could be a perfect storm coming as most borrowers who fixed their rates over the last six months roll on to variable rates at that time.”

“While the lenders have protected themselves with serviceability buffers, it will be borrowers who may have overextended themselves that will suffer.”

Loan Market executive director Andrea McNaughton said the RBA’s decision to hold the official cash rate at current record-low levels would support housing affordability initiatives, including the extended First Home Loan Deposit Scheme (FHLDS), increased access to superannuation for first home buyers (FHBs) and the Family Home Guarantee.

She said that the volume of FHB loans serviced by Loan Market had increased by 79 per cent over the last financial year compared with 2019-20, as FHBs were incentivised by record-low interest rates, state government grants, and the HomeBuilder grant.

Single FHBs accounted for more than 47 per cent of FHB loans settled by the major brokerage, Ms McNaughton added.

She said: “Brokers should expect to start the new financial year fielding strong levels of enquiry from first home and single-parent buyers.”

“Keeping the official cash rate on hold will mean those who need to get onto the property ladder can pursue the new federal government housing initiatives with greater confidence.”

Mortgage Choice CEO Susan Mitchell said that despite no changes to the cash rate, the major brokerage’s monthly home loan approval data has revealed high demand for refinancing since December 2020, with borrowers still seeking superior interest rate deals.

She said: “Nearly 40 per cent of loans approved in June were for the purpose of refinance. While this isn’t as strong as the COVID high of over 48 per cent in April 2020, it shows that Australians continue to take advantage of the extremely competitive home loan market.

“Our customers are seeking certainty by locking in part or all of their home loan interest rate. Mortgage Choice monthly application data shows that demand for fixed rates remained strong in June after reaching a five-year high in May, with over 42 per cent of home loan applications having a fixed component.”

In addition, Ms Mitchell said that strong employment figures and wider economic recovery could place pressure on the RBA to increase the cash rate sooner than forecast.

She also warned that “the latest lockdown measures are a sobering reminder that the pandemic is not over, reinforcing the need for ongoing fiscal and monetary support”.

She concluded: “There’s no question that the latest lockdowns will dampen economic activity. However, it remains to be seen what impact they will have on the nation’s housing market.”

[Related: RBA announces June rate decision]