The Reserve Bank of Australia (RBA) has held the official cash rate at 0.10 per cent this month, as widely anticipated.
Indeed, following the bank’s decision to cut the cash rate to its record low in November 2020, RBA governor Philip Lowe revealed that the central bank did not expect to increase the official cash rate for “at least three years”, or at least until there is a lower rate of unemployment and a return to a “tight” labour market.
“Given the outlook, the board is not expecting to increase the cash rate for at least three years. The board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The board is prepared to do more, if necessary.”
As such, the RBA has decided to hold the rate where it is and continue its broader quantitative easing program, as announced in November, which includes a program of government bond purchases, including the purchase of $100 billion of government bonds over the next six months (purchasing bonds issued by the Australian government as well as by the states and territories).
AMP Capital’s head of investment strategy and chief economist, Shane Oliver, stated: “As widely expected, the RBA left the cash rate on hold at its December meeting and made no further changes to its bond buying (or quantitative easing) program.
“After a significant package of further easing at its November meeting – with a cut in the cash rate, term funding facility rate and three-year bond yield target to 0.1 per cent; the commencement of a six-month $100 billion bond buying program; and a dovish shift in formal guidance to not increase the cash rate until actual inflation is sustainably in the 2-3 per cent target range – no further easing was expected at this month’s meeting.
“Basically, the RBA is back in wait-and-see mode as it assesses how the recovery is preceding and how it’s most recent easing measures are helping. So far, it has purchased $19 billion of bonds under its $100 billion government bond purchase program.”
He added: “Since the November meeting, the news has been good with three vaccines reporting high levels of efficacy, holding out the promise of a gradual return to normal through next year, and recent Australian economic data has surprised on the upside, with September quarter GDP (to be released tomorrow) expected to confirm the start of a recovery, which the RBA notes is ‘underway’.
“Reflecting the combination of good vaccine news and better than expected Australian economic data the RBA sounded a little bit more upbeat in terms of the outlook.
“Nevertheless, it still sees the recovery as likely to be ‘uneven and drawn out’, and given the uncertainties around the outlook and the high level of spare capacity – notably unemployed and underemployed workers – in the economy that needs to be absorbed, the RBA reiterated that it does not expect to raise interest rates for at least three years
“This remains our view. However, we remain of the view that further monetary easing still can’t be ruled out,” he said.
Mr Oliver concluded: “With the RBA remaining ‘extraordinarily unlikely’ to adopt negative interest rates, any further easing will take the form of additional bond buying (or QE). The good news on the vaccines and the economy have reduced the risk of more QE beyond the $100 billion bond buying and yield curve control programs, but it’s still significant for the simple reason that the RBA is still not expected to meet its full employment and inflation objectives over the next few years, and the Australian dollar is likely to push higher in the face of rising commodity prices, which will act as a dampener on the recovery. Consistent with this, the RBA notes that it’s keeping its bond purchase program under review and is prepared to do more if necessary.
“Working in the opposite direction may be the rebound in house prices. At present, this is not a concern for the RBA (and didn’t even rate a mention in the post-meeting statement) as average prices are still below 2017 highs and growth in household debt is slow. But it may become more of an issue next year if house price gains continue to gather pace, raising concerns about financial stability. In the first instance, this should drive a wind-back of government home buyer incentives, but, if this is not enough, pressure on the RBA and APRA to retighten lending standards may become apparent in the absence of an ability to raise interest rates given weakness in the broader economy.”
CoreLogic’s head of research, Tim Lawless, highlighted that “most indicators are pointing towards a faster than forecast recovery thanks to record-low interest rates, along with ongoing fiscal support and containment of the virus”.
“From a housing market perspective, home buyers are clearly responding to the unprecedented levels of stimulus available. CoreLogic’s national home value index notched up two consecutive months of growth in November, and settled sales over the past three months are estimated to be around 1 per cent higher than the same period a year ago.
“With interest rates set to remain at these record lows for an extended period of time, attention is already focusing on how to manage associated risks of an ‘overheated’ housing market while at the same time allowing the economy to benefit from the stimulus,” he said.
Mr Lawless continued: “Rising asset prices are a logical outcome of such low interest rates, and hopefully we see the wealth effect flowing through to other areas of the economy as households lift their spending.
“No doubt regulators and policymakers will be watchful for excessive exuberance in the housing sector; higher household debt levels or a rise in riskier types of lending could trigger a regulatory response. Previous macro-prudential interventions have had an immediate dampening effect on housing market conditions,” he concluded.
Likewise, Jason Azzopardi from Resimac, said: “RBA monetary policy indicates QE and a period of sustained low rates will remain.”
Finsure managing director John Kolenda commented: “The RBA is due for some long service leave next year after cutting rates three times in response to the coronavirus pandemic.
“I expect rates to be left on hold for some time, and we may even see a similar situation to a few years ago when the RBA left rates on hold between September 2016 and June 2019, when it lowered the cash rate from 1.5 per cent to 1.25 per cent,” Mr Kolenda said.
Mr Kolenda said expectations of a spending spree in the lead-up to Christmas this year also augured well for the domestic economy.
“There are some very positive signs of a rebound with consumer confidence and spending on the rise, which is an indicator we have likely seen the worst of the downturn,” he said.
“I expect the property market will be a strong feature of the national economy over the coming 12 months, with strong results being recorded around the country.
“Consumers are also taking advantage of the low home loan rates on offer and refinancing in big numbers with fixed rates now under 2.0 per cent and lenders competing fiercely for business.
“All signs across the economy indicate we might have hit the bottom and that rates have also hit that level and we are not likely to see any further easing in the foreseeable future.
“Despite the positive outlook, mortgage-holders need to be vigilant about the interest rate they are paying,” Mr Kolenda concluded, adding they should “contact an experienced mortgage broker to make sure [they] are getting the best deal”.
Harley Dale, chief economist at CreditorWatch, commented that the RBA had made its “universally expected decision”, adding: “The RBA fired its last interest rate bullet in November, taking the official cash rate (OCR) to a barely positive rate of 0.1 per cent.
“The RBA is pleased with the substantial stimulus that the federal and state governments have provided. The combination of super low interest rates and hefty fiscal policy has created the defensive line Australia required in 2020 to avoid the chronic impact that COVID-19 is having in Europe and the United States. It is also worth remembering that the OCR is not the only weapon in the RBA’s armoury. The bank’s policy of buying government bonds will lower the debt servicing costs stemming from the massive fiscal policy stimulus our governments have undertaken. A widely anticipated strong result for gross domestic product for the September 2020 quarter (out tomorrow) was also part of a more positive tone to the RBA’s interest rate statement.
“The RBA does not meet in January, but will no doubt keenly watch the performance of the retail sector over Christmas and the holiday season,” Mr Dale continued.
“It is widely expected that this sector, battered by the adverse consequences of COVID, will enjoy better returns in December/January than was considered likely even only a few months ago. CreditorWatch data has revealed the struggles the retail sector has experienced, but in coming months this data will provide a leading indication of whether the retail sector is indeed on a sustained path back to healthier trading conditions.”
Cameron Kusher from the REA Group told Finder: “I think the RBA is extremely reluctant to cut further and take rates negative, while I also think they may be somewhat optimistic in their forecasts around a rebound in inflation. I don't see an increase until after 2022, and if anything, a move lower, albeit very reluctantly, looks more likely than an increase, but I am still unsure that would occur.”
[Related: Cash rate won’t rise for 3 years: RBA]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.