RBA makes March cash rate decision

The Reserve Bank of Australia (RBA) has held the official cash rate at 0.10 per cent for March in its second cash rate call for 2021.

The central bank governor Philip Lowe said in his monetary policy decision statement that it has decided to maintain the current policy settings, including the yield on the three-year Australian government bond, as well as the parameters of the Term Funding Facility (TFF), and the government bond purchase program.

However, the RBA has brought forward bond purchases under the bond purchase program this week, with the bank willing to make more changes to its purchases if necessary amid significant rises in bond yield over the past few weeks.

In a statement explaining the central bank’s decision to hold rates in March, governor Philip Lowe said: “The bank remains committed to the three-year yield target, and recently purchased bonds to support the target and will continue to do so as necessary.

“Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market. The bank is prepared to make further adjustments to its purchases in response to market conditions.”

CreditorWatch chief economist Harley Dale welcomed this move by the RBA, stating: "It will provide peace of mind for many businesses that the bank is prepared to make further adjustments to its purchases in response to market conditions."

However, Mr Dale advised small-to-medium enterprises (SME) to bank on their own balance sheets and "creativity" to support their economic growth.

"Key industries that have been suffering from overdue payment times and are ones to watch include healthcare and social assistance, administrative and support services, construction, transport, postal and warehousing, and arts and recreation services," he said.

According to Mr Lowe, to date, a cumulative $74 billion of government bonds issued by the federal government and the states and territories have been purchased under the initial $100 million program.

“A further $100 billion will be purchased following the completion of the initial program, and the bank is prepared to do more if that is necessary,” Mr Lowe said.

Authorised deposit-taking institutions (ADI) have drawn down $91 million under the TFF and have access to a further $94 million, he said.

Mr Lowe also addressed the property market, and observed that housing credit growth to owner-occupiers has increased but investor and business growth has remained weak.

He added that lending standards have remained strong, and said that “it is important that they remain so in an environment of rising housing prices and low interest rates”.

The decision to hold the official cash rate is in line with expectations as the RBA has made clear in the past that it would not increase the cash rate for at least three years, and has indicated that the current rates could remain in place beyond three years, or at least until there is a lower rate of unemployment and a return to a “tight” labour market.

After cutting the cash rate to a record low of 0.10 per cent in November 2020, the RBA held rates at its current level in December and February.

While announcing its rate decision in February, the RBA also announced that it had expanded its quantitative easing program by purchasing an additional $100 billion of bonds.

AMP Capital chief economist Shane Oliver said that while he agrees with the RBA's stance that the meeting of its inflation and jobs goals is still "some time away" and it is too early to consider winding back its easing of monetary policy, he flagged that if the economy continues to "surprise on the upside" like it has been of late (spurred by vaccines for the coronavirus), then there is a "good chance" that the first rate rise could be in 2023.

"But that is still a long way off and so variable mortgage rates will remain low for now, although we may start to see some upwards drift in four-year plus fixed mortgage rates consistent with the back up in long term bond yields," he said.

Commenting on the RBA’s decision to hold rates in March, Westpac chief economist Bill Evans said the “extraordinary developments” in the bond market in late February has not impacted the RBA’s key messages, and added that as such, it had not expected a change in the RBA’s policy settings.

He added that for the central bank to argue that it expects conditions for the first rate increase to be reached by mid-2024, and to abandon its yield curve control policy in mid-2021, it would have to lift its forecasts for wages and inflation growth considerably out to December 2023 in its August statement on monetary policy (SOMP).

“Sustained 2 to 3 per cent inflation and 3.75 per cent wages growth by mid-2024 will, arguably, require wage and inflation forecasts for end 2023 of at least 3.25 per cent for wages and 2.5 per cent for inflation (recall that sustained 2 to 3 per cent inflation will be required to trigger the first-rate hike and that word “sustained” should imply around 2.5 per cent for at least six months),” Mr Evans said.

“Given the starting point from the current February SOMP forecasts, it seems quite a stretch to expect that the forecasts in the August SOMP, for end 2023, will be credibly up to the 3.25 per cent and 2.5 per cent ‘targets’.”

Mr Evans noted that circumstances can change over the next six months, and that there have been “upside surprises” on wages growth and business investment in the December quarter.

Westpac has lifted its forecast for house price growth in 2021 from 4 per cent to 10 per cent, while maintaining its prediction of a 10 per cent price rise in 2022.

“But we also require a spectacular boost to consumer spending per capita of around 5.2 per cent in 2021 (as the 20 per cent savings rate is wound back) to be consistent with our 4 per cent growth forecast (RBA is a little more cautious with a 3.5 per cent growth forecast for 2021),” Mr Evans said.

“Generally, however, Westpac’s forecasts are in line with the RBA’s February SOMP forecasts, (we both expect to see the unemployment rate down to 6 per cent by end 2021).”

[Related: RBA makes February cash rate call]