The first RBA board meeting of the new financial year was one of the most eagerly anticipated in some time. Not because of what might happen with interest rates – which incidentally were left on hold at 0.1% for the eighth consecutive month – but because the RBA was expected to begin winding back parts of its quantitative easing program as the economy continues to recover from coronavirus ahead of schedule.
Since Australia first went into lockdown in 2020, the RBA has splashed out hundreds of billions of dollars on government bonds and kept the yield on three-year government debt under control in order to offer cheap loans to banks…who would then pass more affordable money onto borrowers.
But is all that still necessary?
Three main goals
There has been plenty of speculation from economists and so-called experts that the RBA will raise official interest rates earlier than its repeated promise of “not before 2024”.
In order to consider moving rates away from the historic low of 0.1% and back up towards longer term averages, the RBA wants to see the unemployment rate keep travelling down, wages growth begin to grow again and inflation to get back to a target bracket of 2 to 3%.
And at least one of those boxes is ticked, with unemployment now down to 5.1%, a 17-month low, even as we head into another series of lockdowns in various parts of the country. There are more people employed than before the pandemic kicked off, which is also partly due to the decline in overseas worker arrivals with international borders closed.
However, the RBA statement from today noted that “despite the strong recovery in jobs and reports of labour shortages, inflation and wage outcomes remain subdued”. The statement added that the RBA expects a gradual and modest pick-up in inflation and wages growth, with inflation likely to only reach 2% by mid-2023, after a short-term bounce to 3.5% over the next year due to the reversal of Covid-related price reductions from the previous year.
RBA takes cautious first steps
The anticipated first step to take in getting things back to some kind of normal was to end the targeting of a yield of 0.1 per cent on three-year government bonds. The RBA today however announced it would continue to maintain the current target to “keep interest rates low at the short end of the yield curve and support low funding costs in Australia”.
The next thing to do would be to wind back the level of spending on government debt. The $100 billion quantitative easing program announced in November last year will finish in September.
The RBA today confirmed that it would continue to purchase government bonds after September but would respond to the strengthening economy by adjusting its weekly spend to $4 billion, down from the current spend of around $5 billion. The new spend will be in place until at least mid-November, at which stage the RBA can take stock of the situation again.
So will official rates rise sooner than expected?
The RBA continues to stand firm and say it won’t be in a position to raise rates until at least 2024.
Even though the housing market is strong across major markets, with value growth, housing credit growth and increased borrowing from owner-occupiers and investors, the central bank says it will not increase the cash rate “until inflation is sustainably within the 2 to 3% target range”.
What about the unofficial rates?
As we’ve reported in recent months, Australian lenders are already increasing their rates independently of the central bank.
They began by raising rates on five and four-year fixed rate mortgage products but have since begun to target three and even two-year loans.
A recent analysis found that in the last month, 19 lenders increased a three-year fixed rate, including Westpac and NAB, while 17 increased a two-year fixed rate.
This was the first month that the number of lenders hiking a two-year fixed rate outnumbered those cutting (albeit only by one, 17-16). Meanwhile, for one-year fixed rates, 13 lenders cut, while 11 hiked.
There are still close to 200 loan products out there in the market for below 2%. So, if you are worried, you’re not on the best deal, remember to regularly see what’s out there and refinance when necessary.