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RBA makes Cup Day interest rate call

·4-min read
RBA governor Philip Lowe and Reserve Bank signage on the exterior of the building
RBA governor Philip Lowe has remained steadfast to keep rates at a record low of 0.1 per cent. (Source: Getty)

The Reserve Bank of Australia has kept the official cash rate at a record low of 0.1 per cent for November.

The decision to keep rates on hold was not unexpected, but it was what Philip Lowe said in his statement accompanying the decision that economists were interested in.

In his statement Lowe acknowledged that inflation has picked up but said it is still too low.

“The headline CPI inflation rate is 3 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions in global supply chains,” Lowe said.

“A further, but only gradual, pick-up in underlying inflation is expected.”

Lowe said the RBA expects underlying inflation of around 2.25 per cent over 2021 and 2022, and 2.5 per cent over 2023.

The RBA will discontinue the yield target, reflecting an improvement in the economy and the movement towards meeting the inflation target.

But, the bank has given no indication it will be lifting the rate soon.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time.”

Lowe said the RBA board is “prepared to be patient”, with the central forecast being for underlying inflation to be no higher than 2.5 per cent at the end of 2023.

Lowe added that he expects wages to pick up gradually, as a result of skills and worker shortages.

He said wages are forecast to increase 2.5 per cent next year and 3 per cent in 2023.

“The main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades,” he said.

RBA under pressure

The RBA had remained stubborn in its view that the cash rate would likely not rise until 2024, when it predicted a number of metrics (inflation, wages and unemployment) would be in the target range.

But the recent inflation data threw economists for a loop and put pressure on the central bank to lift the cash rate sooner than expected.

“We have seen tentative signs of re-emerging inflationary pressures, albeit heavily influenced at this stage by COVID-related pressures,” CreditorWatch chief economist Harley Dale said.

Bond yields are rising and the Aussie dollar has recovered some ground. The rapid easing in lockdown restrictions has opened pent-up demand for consumer services.”

Consumer prices rose 3 per cent over the past 12 months driven by a leap in petrol and property prices.

“The RBA is under the pump as the prospects of earlier-than-expected interest rate rises mount,” Dale said.

“As economic conditions move in a way that is sometimes evolving and sometimes revolutionising, the RBA is sticking to its record-low interest rate policy, but not necessarily the timing of it.”

Eyes on December decision

Attention is now firmly on the December interest rate decision that will come on Tuesday, 7 December.

This will be the final RBA statement until 1 February, 2022. The RBA doesn't hold a January meeting.

“The December statement will be a key update, given the bank will have had the opportunity to scrutinise an increasing amount of information regarding post-lockdown economic outcomes,” Dale said.

“The December RBA Monetary Policy Announcement will be the most important of 2021. November 2nd is race day; December 7th is game day.”

Soaring property market

Australia’s booming property market has been putting increased pressure on the central bank to increase the cash rate.

And the bank has flip-flopped on the issue. Lowe previously said it was not the bank’s responsibility to cool the housing market, but later agreed increasing rates would help ease price pressures.

This led to the Council of Financial Regulators, which includes the RBA, the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and Treasury, agreeing to tighten lending rules.

Australians hoping to buy property will be forced to prove they can repay their mortgage if rates rise 3 per cent, under new rules which came into effect yesterday.

APRA announced the higher stress test earlier in October, increasing the test from 2.5 per cent to 3 per cent.

And, despite the RBA keeping the cash rate on hold, that has done little to stop the banks from increasing mortgage rates anyway.

Home owners have been hit with a swathe of rate rises recently and there have been rising concerns many homeowners are facing mortgage stress.

“The trend of lenders increasing fixed interest rates for terms greater than 12 months is also suggesting a higher cash rate some time in 2023,” Canstar’s executive, financial services, Steve Mickenbecker said.

“For a residential borrower with a $500,000 loan on the average variable rate, a 0.25 per cent rate rise would see their monthly repayments increase by $68 to $2,206.”

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