RBA makes cash rate call as lockdown drags on

The RBA previously slashed 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 has repeatedly stated that its board has remained committed to maintaining more flexible monetary policies to support a return to full employment in Australia and inflation consistent with the 2 to 3 per cent target.

It had said that it would not increase the cash rate until actual inflation is sustainably within the target range, adding that the central bank’s central scenario for the economy is that this condition would not be met before 2024.

Nevertheless, speculation has been mounting that a faster-than-expected economic recovery from the COVID-19 crisis could spur the RBA to hike rates before 2024.

However, the latest outbreak of the COVID-19 delta variant and the ensuing lockdowns in Australia (including snap lockdowns across several states and the Northern Territory, and the extended lockdown in NSW) have curbed the chances of a rate rise occurring before RBA’s forecasts.

In his statement on the monetary policy decision for August, RBA governor Dr Philip Lowe said that a pick-up in both wages growth and underlying inflation is expected, but flagged that this pick-up is likely to be only gradual.

“In the bank’s central scenario, it takes some years for the stronger economy to feed through into wage and price increases that are consistent with the inflation target,” Dr Lowe said.

In underlying terms, inflation is expected to be 1.75 per cent over 2022, and 2.25 per cent over 2023, the board has predicted.

“One source of uncertainty is the behaviour of wages and prices at the low levels of forecast unemployment, including because it is some decades since Australia has sustained an unemployment rate around 4 per cent,” Dr Lowe said.

The board reiterated that it would not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range, and does not expect these conditions to be met before 2024. The labour market would need to be tight enough for wages to grow at a significantly higher rate than it is currently.

The board has also decided to continue tapering its government bond-buying program as previously flagged despite the latest lockdown causing disruptions to the economy. It will purchase securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid-November.

Dr Lowe said that the central bank is continuing to monitor trends in housing borrowing “carefully” as housing markets have continued to strengthen and prices have continued to rise in all major markets in a low interest rate environment.

“It is important that lending standards are maintained,” Dr Lowe said.

Housing credit growth has picked up, with demand driven by owner-occupiers (including first home buyers), while borrowing by investors has also picked up.

Delta variant pushes rate rise talk aside

Commenting on the RBA’s rate decision, mortgage aggregator Finsure’s managing director, John Kolenda, stated that the delta variant of COVID-19 has put to bed any suggestions of the RBA bringing forward consideration of lifting official rates from the current record lows, and would keep the RBA on the interest rate sidelines until there is a national economic rebound through the ramping-up of the vaccination program.

“The economic recovery was well on its way until we got hit with this rampant delta variant, which has dealt a blow to our recovery,” he said.

“The lockdowns are a major spanner in the works to any economic rebound, and there will be no talk of any rate movements until the economy recovers. But once we hit the government’s vaccination targets, we should see a very quick recovery, as evidenced in markets around the world where people have returned to some normality.

“We can trust that the RBA will continue to support the economy through these challenging times and wait cautiously until lockdowns are eased.”

Mr Kolenda also warned that lenders have been scrutinising borrowers facing lockdowns and determining whether they have been relying on government support.

“For those seeking finance, lenders may delay any decision on those affected by lockdowns until they get back to work,” he said, adding that banks have been offering alternatives for existing customers in hardship, although they would prefer offering a switch to interest-only payments or drawing down from offset accounts instead of deferring payments.

Noting the RBA board’s decision to remain firm on its commitment to not raise the cash rate this month, Lendi Group CEO David Hyman said that while borrowers have been offered the lowest rates on record, rates would begin increasing at some stage, particularly fixed rates.

“From here we can expect to see more lenders join the few that have already started to lift their fixed rates,” Mr Hyman said.

“However, currently there’s still plenty of competition in the market and some really attractive rates for borrowers.”

According to Mr Hyman, lenders’ fixed rates prior to the GFC and up to 2010 hovered around 7.85 per cent, which dropped to around 3 to 4 per cent prior to the onset of the COVID-19 crisis in 2020.

“No one is thinking that interest rates are heading back to those levels immediately, at least in the next couple of years, but we can expect them to rise at some stage,” Mr Hyman said.

Some lenders recently increased their fixed rates, citing higher funding costs for longer-dated loans and the need to manage pricing changes sustainably.

Lockdown exposes two-speed economy 

Loan Market executive director Andrea McNaughton said that inflation figures have remained below the RBA’s targets, while wage growth was unlikely with the current lockdowns.

While federal and state support packages for businesses impacted by lockdowns would help offset some of the downturn in trade, many businesses would continue to struggle, she said.

“A two-speed economy is emerging, with people employed in industries that rely on face-to-face engagement, like hospitality, retail and tourism enduring tough times with the lockdowns and border closures,” Ms McNaughton said.

The national cabinet’s target of vaccinating 70 per cent of Australia’s population by Christmas would enter the narrative around rates, she added.

“As the vaccination rate climbs, lockdowns will be more targeted, hopefully causing less economic disruption,” Ms McNaughton said.

REA Group CEO, broker, Susan Mitchell said: “The latest lockdowns have reinforced the need for agile fiscal and monetary responses.

“It’s remarkable how quickly the economic outlook can change from one month to the next.”

Regardless, Ms Mitchell noted that economic data released in the lead-up to the lockdowns was strong, indicating robust bounceback of the economy from previous lockdowns.

While the Australian Bureau of Statistics (ABS) labour force data showed a 4.9 per cent dip in the unemployment rate in June (the lowest rate since December 2010), housing loan commitments data fell by 1.6 per cent in June 2021 (seasonally adjusted) but remained historically high, Ms Mitchell said.

Paul Ryan, realestate.com.au economist, said that while the economy is experiencing headwinds, pent-up demand post-lockdown could result in the property market soaring to new highs, and an increase in vaccinations should help the economy open up sooner.

[Related: RBA delivers first rate decision for FY21-22]