The Reserve Bank has decided to leave the national interest rate at the historic low of 0.1 per cent for the month, but has given its first signal that rates could rise earlier than expected.
"The economic recovery in Australia is stronger than earlier expected and is forecast to continue," RBA Governor Philip Lowe said on Tuesday.
The investment outlook has improved, and household and business balance sheets are both "generally in good shape".
Lockdowns across several capital cities have been a bump in the path to recovery, he added, albeit temporary.
"One near-term uncertainty is the effect of the recent virus outbreaks and the lockdowns. But the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly."
In the first indication that rates could rise earlier than 2024, which the Reserve Bank has previously insisted on, Lowe stressed that the cash rate would move depending on the economic conditions, not the length of time.
"I want to re-emphasise the point that the condition for an increase in the cash rate depends upon the data, not the date; it is based on inflation outcomes, not the calendar," he said.
"The central scenario remains that the condition for a lift in the cash rate will not be met until 2024."
'Long way to go'
The move was overwhelmingly in line with pundits’ expectations, none of whom anticipated the Reserve Bank would make a significant move this month.
“There is still a way to go to reach the RBA’s conditions for a rate hike,” said AMP Capital chief economist Shane Oliver.
The RBA will be looking for wages growth of around 3 per cent and inflation between 2-3 per cent, he added.
But Lowe described both indicators as "subdued", with underlying inflation expected to be 1.5 per cent in 2021 and 2 per cent by mid-2023, while CPI inflation is expected to rise "temporarily" to 3.5 per cent over the year to the June quarter.
"While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest," he said.
The last time wages growth was above 3 per cent was a decade ago, Lowe said, and it would be unlikely it would shoot up to these levels within the 18 months.
The Reserve Bank board will wait for their cues from the US Federal Reserve before hiking rates, Bloomberg believes.
The record-low interest rates have spurred a heated property market that saw dwelling prices in several capital cities surge by double digits in the 2020 financial year.
Bond purchases also announced
The RBA has also kept the April 2024 bond at 10 basis points, and will keep buying government bonds at the rate of $4 billion a week after the current bond purchase program ends in early September.
"The bond purchase program is playing an important role in supporting the Australian economy," Lowe said.
"The Bank will continue to purchase bonds given that we remain some distance from the inflation and employment objectives."
Lenders hike rates
Though the Reserve Bank has repeatedly said it’s “unlikely” to move interest rates until 2024, lenders aren’t waiting around, with 19 lenders already making moves to hike home loan rates, according to RateCity.
All of the Big Four banks have already lifted their home loan rates, with Australia’s largest bank Commonwealth Bank the first to move in late March, raising four-year fixed rates while slashing one- and two-year rates
This was followed roughly a month later by Westpac, which lifted four- and five-year fixed rates by 0.3 per cent for owner-occupier loans.
On 10 June, ANZ also lifted its four- and five-year fixed mortgage rates for owner-occupiers, and later that month NAB followed suit, upping its two, three, and four-year fixed rates.
Murmurs that RBA may hike earlier than expected
Experts think the RBA will be forced to hike rates earlier than expected.
“We expect the conditions for a rate hike to be in place by 2023 so anticipate a 2023 rate hike,” Oliver said.
“It is likely that during 2022, underlying inflation will hit or exceed the mid-point of the RBA’s target. When this happens, it will be clear that a 0.1 per cent official cash rate will be inconsistent with these fundamentals on inflation and wages,” independent economist Stephen Koukoulas wrote for Yahoo Finance.
“2024 at the earliest is the timeframe the RBA is flagging. But such are the wage and inflation pressures building now that it may have to revise this timetable to sooner rather than later.”
Finder’s most recent survey found a third of its economists and experts on a panel of more than 40 believe that the RBA will hike as early as next year.
“Steady as she goes for now, but [there will] likely be an interest rate increase sooner than previously envisaged, possibly sometime in 2022,” said CSLA Premium chairman Peter Boehm.
“I think there will be a move upward in official interest rates just before the end of 2022 as our economic recovery gathers [at] a faster pace and RBA will need to moderate inflationary pressures,” added Propertybuyer founder and economist Rich Harvey.
Key COVID-19 stimulus measure ends
The RBA’s term funding facility (TTF), which provides a high amount of funding to banks and financial institutions at very low interest rates, wrapped up at the end of last month.
The end of this scheme will serve to further push up interest rates, said RateCity research director Sally Tindall.
“The RBA’s term funding facility was helping banks put sub-2 per cent rates on the table. We expect more rates will rise now this ultra-low funding source has closed,” she said.
There are just under 40 three-year fixed rates below 2 per cent, but this won’t hang around for long, she added.
“In a matter of months, they could be extinct.
“That said, there are still 189 home loans under 2 per cent. They’re not all going to disappear overnight.”