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RBA makes February interest rate call, ceases bond purchases

RBA governor Philip Lowe on a background of Australian currency.
The RBA has made its February cash rate decision. (Source: Getty)

The Reserve Bank of Australia (RBA) has kept the cash rate at a record low 0.10 per cent and has reaffirmed it is not preparing to raise interest rates anytime soon.

RBA governor Philip Lowe said the board decided to wind back quantitative easing (QE) measures by stopping its bond buying program on the 10th of February.

These measures were put in place to help stimulate the economy by pumping extra cash into it when the pandemic broke out.

Lowe said ceasing the bond buying program was not an indication that rates will rise soon, but rather following in the footsteps of many other central banks that have taken the same measures.

“The Omicron outbreak has affected the economy, but it has not derailed the economic recovery. The Australian economy remains resilient and spending is expected to pick up as case numbers trend lower,” Lowe said.

“Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates. As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

Inflation pressures not enough

Lowe acknowledged that inflation has picked up, but said it is too early to tell whether it will remain at its current level.

“There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved,” he said.

“The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

Despite showing little concern for the recent rise in inflation, Lowe admitted it had risen faster than the RBA had predicted.

“Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries,” he said.

The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains.”

Lowe said the RBA is expecting inflation to increase further, hitting around 3.25 per cent before falling to 2.75 per cent by the end of next year.

Underlying inflation is currently sitting at 2.6 per cent.

Rate hikes loom with or without RBA

Even if the RBA keeps the cash rate at a record low of 0.10 per cent for the remainder of the year, banks are likely to keep hiking fixed rates on the back of rising funding costs. data shows the average of the Big Four banks’ lowest fixed rates have risen, in some cases, by 1 per cent or more over the last year.

While variable rates have generally been steady or dropping, some banks could hike variable rates later this year, ahead of the RBA.

Rising interest rates will limit the maximum amount new borrowers can get from a bank.

For example, if the cash rate rises by 0.40 per cent by October, a person earning $100,000 who applies for a loan at this time might find they can borrow $31,900 less than they would today.

“With inflation rising, both at home and overseas, pressure is building on the RBA to hike the cash rate,” research director Sally Tindall said.

“The RBA wants to see stronger wages growth before it asks mortgage holders to pay more.”

Tindall said that even if the RBA were to hold out until 2023, there was a strong chance lenders would hike variable rates anyway.

“A series of cash rate hikes, whenever they come, are likely to put a handbrake on our property market,” she said.

“Anyone borrowing at capacity will see their budget shrink, which could be enough to cool things down, particularly in property hotspots such as Sydney and Melbourne.”

House prices have continued to rise this year, albeit at a slower pace than last year.

The most recent Corelogic data found property prices in Australia increased 1.1 per cent in January.

This is an increase from December, when house prices were up 1 per cent.

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