RBA makes May cash rate decision

The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 0.10 per cent for May, aligning with its position of leaving rates unchanged for the foreseeable future.

In his statement on the RBA’s decision, governor Dr Philip Lowe said that it has maintained its current policy settings, including the yield on the three-year Australian government bond, as well as the parameters of the term funding facility.

Dr Lowe said that the economic recovery has been stronger than expected and is predicted to continue, particularly in employment, with unemployment figures falling further to 5.6 per cent in March and the number of people with a job now exceeding pre-pandemic levels.

The RBA expects the unemployment rate to be around 5 per cent at the end of the year and around 4.5 per cent at the end of 2022. It also said the central scenario for GDP growth has been revised up further, with growth of 4.75 per cent expected over 2021 and 3.5 per cent expected in 2022.   

However, noting the Australian Bureau of Statistics (ABS) data revealing that CPI rose by only 0.6 per cent this quarter, Dr Lowe said: “Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy.

“A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1.5 per cent in 2021 and 2 per cent in mid-2023. In the short term, CPI inflation is expected to rise temporarily to be above 3 per cent in the June quarter because of the reversal of some COVID-19-related price reductions.”

Dr Lowe also said that house prices have risen in all major markets while housing credit growth has picked up, with strong demand from owner-occupiers, particularly first home buyers (FHB).

“Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” he said.

The board also announced that it will not extend the term funding facility, which is due to expire on 30 June. Dr Lowe said that authorised deposit-taking institutions (ADI) have drawn $100 billion so far and a further $100 billion is currently available.

“Given the facility provides funding for three years, it will continue to support low funding costs in Australia until mid-2024,” Dr Lowe said.

Treasurer signals pandemic budget

The cash rate decision has come a week before the release of the 2021-22 federal budget, due to be delivered on 11 May.

In his pre-budget address to the Australian Chamber of Commerce and Industry on 29 April, federal Treasurer Josh Frydenberg said the government would deliver another “pandemic budget” just seven months after the previous budget.

He said that while unemployment levels of 5.6 per cent in March is below Treasury forecasts and well below the 7.5 per cent forecast in the March quarter 2020-21 Mid-Year Economic and Fiscal Outlook, and business conditions are at their highest on record, he nevertheless stated that there is “enormous uncertainty” on the economic and health front.

“Despite the strength in our domestic economic recovery, the unemployment rate is not yet ‘comfortably below 6 per cent’,” he said.

“Interest rates are close to zero. These are unusual and uncertain times. For these reasons, we remain firmly in the first phase of our economic and fiscal strategy.

“We will not move to the second phase of our fiscal strategy until we are confident that we have secured the economic recovery. We first want to drive the unemployment rate down to where it was prior to the pandemic and then even lower. And we want to see that sustained.”

He continued: “Moreover, monetary policy is heavily constrained. Unlike prior to the crisis, the Reserve Bank has reduced scope to lower interest rates to drive unemployment lower and wages higher. This has placed more of the burden on fiscal policy.”

The RBA cut the cash rate to the current record low of 0.10 per cent in November 2020, but held rates in December and February.

The RBA held the official cash rate at 0.10 per cent in March while bringing forward bond purchases under the bond purchase program, adding that it was willing to make more changes if necessary.

After holding rates in April, Dr Lowe said in his statement that the board will continue to monitor housing borrowing amid rising house prices in most markets, and added that maintaining lending standards is important.

RBA sticks to its rhetoric 

Commenting on the RBA’s rates decision, CreditorWatch chief economist Harley Dale said that the decision to leave the rate unchanged at 0.10 per cent has “silenced” any speculation about an early rise in interest rates, not only by continuing RBA rhetoric but by the subdued consumer price index (CPI) data released by the Australian Bureau of Statistics (ABS) last week.

“The RBA mantra is intact – we won’t be seeing a rise in interest rates for a very long time,” Mr Dale said.

“That said, history tells us the first increase in interest rates always occurs at a different point in time than early forecasts, but the need for conjecture is still a couple of years off.

“In 2021, all eyes are on the RBA’s bond buying program – the primary ammunition left in the armoury. A further injection of liquidity is highly likely, in CreditorWatch’s view.”

Mr Dale also said a range of post-JobKeper updates are due to be issued in May for April and beyond, with the RBA likely to have preliminary data by the time the board meets on 1 June.

“As these economic updates start to flow, we have the release of the May Quarterly Statement on Monetary Policy this Friday,” he said.

“With the aggregate economy still masking the true health of individual sectors, it will be interesting what latest insights the RBA may bring to bear in relation to the various components of the Australian economy.”

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[Related: RBA makes April cash rate decision]