RBA makes cash rate call for April

In his statement on the monetary policy decision, RBA governor Dr Philip Lowe said the central bank will continue to monitor trends in housing borrowing “carefully” given that house prices have risen in most markets, adding that “it is important that lending standards are maintained”.

He added that the board remains committed to the three-year government bond yield target of 10 basis points, and consider later in the year whether to retain the April 2024 bond as the target bond or to shift to the next maturity.

“The initial $100 billion government bond purchase program is almost complete, and the second $100 billion program will commence next week,” Dr Lowe said.

While noting that economic recovery is “well under way”, Dr Lowe said wage and price pressures have remained subdued, with this trend expected to continue for some years.

“The economy is operating with considerable spare capacity, and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target,” he said.

During the March board meeting, the RBA held the official cash rate at the current record low of 0.10 per cent while bringing forward bond purchases under the bond purchase program. The RBA added that it was willing to make more changes to its purchases if necessary.

After cutting the cash rate to a record low of 0.10 per cent in November 2020, the RBA held rates at its current level in December and February.

The decision to hold the official interest rate at the current level has aligned with the RBA’s past assertions that it would not increase the cash rate for at least three years, if not longer.

While Mr Lowe recently noted in an address to the AFR Business Summit that high bond yields in the recent past had seen other central banks around the world bringing forward their timing of expected increases of the cash rate, he reiterated this was “not an expectation that we share”.

Mr Lowe has said in the past that the RBA is targeting a sustainable inflation range of between 2 and 3 per cent in order to increase the rate.

He told the AFR Business Summit that for this to occur, wages growth would need to be sustainably above 3 per cent.

“This is assuming that Australia generates ongoing growth in labour productivity and that the profit share of national income does not continue to trend higher,” he said.

“The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time.”

Commenting on the RBA’s rate decision for April, Finsure managing director John Kolenda warned that while the RBA is unlikely to increase the cash rate in the near future, lenders have begun lifting long-term fixed interest rates due to a “blowout” in funding costs.

He noted that the Commonwealth Bank of Australia (CBA) became the first of the big four banks to increase long-term fixed mortgage rates.

He said: “Fixed rates appear to have bottomed out and consumers with existing home loans should consider fixed rates as an option before they start to rise.

“While you can secure some of the lowest ever interest rate pricing with a fixed rate, but this needs to be carefully considered. Fixed home loan rates can provide certainty to borrowers or you can take a part fixed and part variable rate to allow for some flexibility.”

Mr Kolenda also said that attention has turned to property prices and the bond market amid stagnant official cash rates.

“Bond market pricing is on the way up with an increase in rates over the next 12 months,” Mr Kolenda said.

He added that economic data over the next two quarters will provide more insight into any possible cash rate rises following the removal of federal government support such as JobKeeper in response to the COVID-19 crisis.

“It appears the economy is rebounding better than expected from the pandemic and the unemployment data will be a key indicator for any possible change,” he said.

Home Loan Experts CEO Alan Hemmings said the RBA’s decision was expected despite concerns about how “overheated” the housing market may become.

“While the RBA will be watching affordability closely over the next few months and we may see some regulatory measures in the future, it would be premature to increase rates at this stage. What I do expect to see is low fixed rates begin to rise as the government slows its term funding facilities for lenders.”

Loan Market executive director Andrea McNaughton said that while there is currently considerable competition in the housing market due to record-low interest rates and the economic recovery from the coronavirus pandemic, she recognised that the “RBA takes a holistic view of the economy”.

“Unemployment figures still have some way to come down before wages growth is felt in the marketplace,” Ms McNaughton said.

“Combined with the end of JobKeeper, the RBA will wait and see how the economy progresses in the immediate term before considering any change.

“Brokers can expect to be super busy, though, in coming months. There are expectations that more properties will come to the market over the mid-year period as sellers are motivated to capture the current price growth.”

Mortgage Choice CEO Susan Mitchell urged borrowers to review their home loan rates, noting that despite interest rates currently remaining at record lows for variable and fixed rates, some lenders (like the CBA) are raising their rates, particularly on four and five-year fixed rate home loans.

“With the RBA’s term funding facility set to end in June, further upward pressure on fixed interest rates may continue later this year,” Ms Mitchell said.

“Borrowers seeking certainty in their home loan repayments continue to fix part or all of their home loan.

“Mortgage Choice monthly approval data reveals that demand for fixed rate home loans reached a new high with 38 per cent of loans having a fixed component over the month of March – this is even higher than the 2020 peak in July 2020 at 34 per cent.”

In his recent opening statement to the economics legislation committee, secretary to the Treasury, Dr Steven Kennedy, provided an economic update since the mid-year economic and fiscal outlook, stating that the unemployment rate had fallen to 5.8 per cent in February, well below Treasury’s forecast of the unemployment rate to peak in the March 2021 quarter to 7.5 per cent.

He further stated that the unemployment rate would continue to decline in the coming months, adding that it would need to reach within a range of 4.5 per cent and 5.0 per cent for wages to rise, which he said is lower than the previous estimate of 5.0 per cent.

[Related: RBA announces rate decision for March]