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RBA delivers new financial year rate decision

The RBA has announced its decision for the official cash rate for July, as well as changes to strategies around its government bond-buying program.

The Reserve Bank of Australia (RBA) has held the official cash rate at the current record low of 0.10 per cent, amid speculation of rate rises earlier than outlined by the RBA.

However, the RBA has not changed its stance on possible rate rises before 2024, with RBA governor Philip Lowe saying in his statement on the monetary policy decision: “The board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.

“It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The bank’s central scenario for the economy is that this condition will not be met before 2024.”

In its July monetary policy decision statement, the RBA board also announced that it has decided to:

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  • Retain the April 2024 bond as the bond for the yield target and retain the target of 10 bps;
  • Continue purchasing government bonds but at a reduced amount after completing the current bond purchase; and program in early September. These purchases will be wound back to a rate of $4 billion a week until at least mid-November (down from a pace of around $5 billion a week).

In addition, Dr Lowe said that it will be monitoring trends in housing borrowing “carefully” in an environment of rising housing prices and low interest rates.

“It is important that lending standards are maintained,” he said, while noting the strong demand from owner-occupiers, including first home buyers (FHB), and increased borrowing by investors.

In the lead-up to the decision, AMP Capital chief economist Dr Shane Oliver had predicted earlier this week that the RBA would remain relatively “dovish” amid the ongoing threat posed by lockdowns and the COVID-19 crisis.

“While we expect it to stick to the April 2024 bond for its yield target and announce some tapering of its bond buying, it’s likely to reiterate that rate hikes remain a long way off,” Dr Oliver had stated.

The RBA cut the official cash rate to the record low of 0.10 per cent in November 2020, and simultaneously moved to broad quantitative easing.

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The RBA board’s decision and comments have come amid market speculation that the central bank may increase the official cash rate before the RBA’s long-term deadline of 2024.

A survey of the property industry by ANZ and the Property Council found that 30 per cent of respondents are expecting the cash rate to rise over the next 12 months, while a HashChing survey revealed that over 55 per cent of brokers felt that a rate hike was likely in 2021.

Several lenders, including ANZ, the Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB), Westpac, and ING, have increased their longer-term fixed mortgage rates, with some citing the need to manage pricing changes in a sustainable manner, while others attributed the increase to higher funding costs for longer-dated loans.

The rate rises have come amid the expiry of the RBA’s term funding facility (TFF) on 30 June, with lenders anticipating a rise in funding costs over the next few years.

In its July monetary policy statement, Dr Lowe said that the final drawdowns under the TFF were made in late June, with $188 billion drawn down, which he said has contributed to the banking system being highly liquid.

He also said that as the facility is providing low-cost fixed-rate funding for three years, it would continue to support low borrowing costs until mid-2024.

The RBA launched the $90-billion TFF for the banking system in March 2020 amid the onset of the coronavirus pandemic in Australia. The facility was aimed at supporting the flow of credit to small-to-medium enterprises (SME) by providing authorised deposit-taking institutions (ADI) with three-year funding facilities at a fixed rate of 0.25 per cent.

The facility has been providing low-cost fixed rate funding for ADIs for three years, with the RBA stating that it would continue to support low borrowing costs until mid-2024.

CreditorWatch chief economist Harley Dale noted that speculation about impending rate rises have been rife, and the RBA is “inching into that debate”.

However, he warned: “Let us not get ahead of ourselves, which many seem to be doing. The May 2021 RBA Credit Aggregates and the May results for the CreditorWatch monthly Business Risk Review are just two of many examples of how Australia’s recovery lacks the breadth and depth we require.

“There are holes in the ‘how good are we doing’ headlines, and that includes a sharemarket that is more vulnerable than seems to be the focus that it deserves.

“Right now, nobody knows when circumstances will become appropriate for interest rates to rise, and that includes the RBA itself.”

The RBA’s May 2021 financial aggregates data revealed that housing credit totalled 0.6 per cent in May, rising marginally from 0.5 per cent in April.

Total credit grew by 0.4 per cent in May 2021 compared with 0.3 per cent in April 2021, and 1.9 per cent in May 2021 compared with 3.2 per cent in May 2020.

Credit bureau and information services provider Experian warned lenders about the importance of continuously profiling borrowers to assess and reassess their financial health and risk even though the RBA may not increase the cash rate in the near future.

ANZ general manager of decision analytics Mathew Demetriou said: “Borrowers will be required to pay back more each cycle sooner than expected, and adjusting to new mortgage servicing costs could find themselves in financial stress.

“Lenders need to have processes in place now that can monitor their customers’ financial situation, meaning they can proactively support them if required and keep as many customers out of financial hardship as possible.”

Experian’s latest research showed that four in five Australians said they believe that providers could be doing more to proactively identify customers who could be headed towards financial hardship, or communicate with them earlier, Mr Demetriou said.

Furthermore, Experian’s research showed that even pre-pandemic, eight in 10 Australian businesses considered the increasing volume of loan applications a challenge, while half of consumers surveyed in June expect a home loan approval within 24 hours, and 75 per cent expect approval within three days, he said.

“This influx of loan applications stemming from record-low cash rates continues to put a strain on lenders, and with the RBA cash rate remaining as is for now, it's likely this demand for loans will remain high,” Mr Demetriou said.

May 2021 lending indicators figures from the Australian Bureau of Statistics revealed that new home loan commitments rose to a new high of $32.6 billion, driven by a 13.3 per cent spike in investor lending to $9.1 billion (the highest level since April 2015).

[Related: RBA reveals rate decision for June]

RBA delivers new financial year rate decision
RBA delivers new financial year rate decision
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Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.

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