RBA maintains course as cash rate stays on hold

The Reserve Bank of Australia has kept the official cash rate on hold at its record low and maintains that it is unlikely to increase it before 2024 even as economists and experts continue to speculate that an earlier rise is on the cards.

Reserve Bank of Australia signage
The RBA says Australia's economic recovery has been strong, but not strong enough for it to increase the official cash rate. Photo: Shutterstock (Image source: Shutterstock.com)

The Reserve Bank of Australia has kept the official cash rate on hold at its record low and maintains that it is unlikely to increase it before 2024, even as economists and experts continue to speculate that an earlier rise is on the cards.

RBA governor Philip Lowe said while Australia’s economic recovery and progress in reducing unemployment had been faster than anticipated, inflation and wage pressures remained subdued.

Dr Lowe said the RBA would not increase the cash rate from its current 0.1 per cent until actual inflation remained in the 2 per cent to 3 per cent target range.

“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently,” Dr Lowe said.

“This is unlikely to be until 2024 at the earliest.”

While housing markets continue to strengthen on the back of sustained demand from first homebuyers and an uptick in investor activity, Dr Lowe said the RBA would continue to monitor borrowing trends closely rather than shift its monetary policy.

And while experts have speculated that the end of the RBA’s Term Funding Facility on June 30 would result in banks hiking rates across the board, that may not necessarily be the case. 

“So far, authorised deposit-taking institutions have drawn $134 billion under this facility and a further $75 billion is available,” Dr Lowe said.

“The facility is providing low-cost fixed-rate funding for three years and so will continue to support low borrowing costs until mid-2024.”

Despite Dr Lowe’s assurances, however, 25 of the 40 participants in Finder’s monthly RBA cash rate survey said they expected the cash rate to increase in 2023 or later.

Six of the experts said they expected the hike to occur towards the end of 2022, while 4 said the cash rate could rise before the end of this year.

“The RBA has continued to reaffirm its commitment to lifting the cash rate only when ‘actual’ inflation is between the 2 per cent to 3 per cent target, which they don’t expect to happen until 2024,” Bankwest Curtin Economics Centre deputy director Rebecca Cassels said.

“Some might say that this is quite a pessimistic outlook given the recovery and acceleration in the economy lately.

“Will it really take 2.5 years to reach this target? Not if the labour market continues to tighten and wage rises follow.

“This is a real possibility given the noises on the ground - particularly in Western Australia - and we should expect this to feed into the wage price index sooner rather than later.

“If it doesn’t, then either something is up with the index, or something is up with the ability of market mechanisms to deliver wage increases.”

CLSA Premium’s Peter Boehm was one of the experts predicting a rate rise before 2024.

“While the RBA has indicated rates will likely be held at their current levels for the next few years, it seems more likely its hand will be forced as inflation in Australia and other economies in the Western world heads up,” Mr Boehm said.

“And if rates are increased earlier than predicted, this will reflect a positive sign for employment and the economy.

“However, it won’t be such good news for borrowers (government, corporate and homeowners) who could see substantial increases in their mortgage payments and debt burden.” 

Griffith University’s Tim Nelson said while the RBA had inflation and wages growth on its radar, external factors could also force its hand to hike rates earlier than 2024.

“The Reserve Bank is currently independent in name only because it has to set official interest rates in line with US Federal Reserve rates,” Associate Professor Nelson said.

“Otherwise the dollar would appreciate and set back the post-lockdown recovery.

“The only way for the US, Australian and global interest rates to go up is due to rising inflationary pressures and expansionary fiscal policy here and in the US.”

Finsure managing director Steve Kolenda said Victoria’s latest COVID-19 lockdown should be another consideration for the RBA, with the shutdown of much of the state a reminder of the vulnerability of the domestic economy to the pandemic.

Mr Kolenda said while the RBA reiterated its 2024 target to lift rates, its counterparts in New Zealand are projecting an interest rate rise by the second half of 2022.

“New Zealand’s situation highlights how economies around the world are recovering from the pandemic,” Mr Kolenda said.

“The US economy is rebounding, Britain is coming out of lockdown and Australia’s economy is surging, although the lockdown in Victoria highlights how fragile the recovery can be.

“That uncertainty for our domestic economy will continue until we make much more progress with the national vaccination program.”

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