The RBA has left its cash rate on hold at 0.1% during its May meeting today which came as no surprise to analysts.
The decision marked the sixth straight month the rate has remained unchanged, after Australia’s central bank lowered it to 0.1% in November 2020.
RBA Governor Philip Lowe has repeatedly stated in recent months that the rate would remain unchanged until at least 2024, as the bank attempts to maintain its commitments on interest rates and market expectations.
One of these commitments is the three-year government bond yield target of 10 basis points. The initial $100 billion government bond purchase wound up last month and the next $100 billion program is underway.
More jobs but wages stagnant
As Australia’s post-pandemic economic recovery continues, unemployment is on a downward trajectory from its 5.8% level in February, but still remains too high for the RBA’s liking and wage and price pressure remain subdued.
There had been speculation from some corners that rates could fall into negative territory since the November rate cut, which saw the RBA move away from the traditional 25 basis point reduction that would have taken the official rate all the way to 0%, and instead lowered by 15 basis points. But so far the RBA has remained firm.
Most analysts predicted the hold decision, with AMP economist Shane Oliver saying that while he believes a rate rise will come before 2024, now was not the time to make a move.
“While the economy is recovering faster than expected, the RBA is still a long way away from seeing its stated requirements for a rate hike… a tight jobs market, wages growth well above 3 per cent and actual inflation sustainably within the 2 to 3 per cent target range,” he said.
Fellow economist Saul Eslake agreed that a hike may come before 2024, but that wages growth needed a major boost first.
“It will take some time for unemployment to fall to a sufficiently low level to trigger wages growth fast enough to ensure price inflation sustainably within the RBA’s 2 to 3% target range – but I suspect that situation may be reached before ‘2024 at the earliest’,” Eslake wrote in his forecast.
Banks looking four years ahead
Meanwhile in a sign that major banks think official rates have bottomed out and will rise after 2024, lenders have begun increasing rates on long term fixed products.
Last week Westpac and its subsidiaries increased rates on their four and five-year fixed loan offerings.
Westpac’s four-year rate of 1.89% was previously the lowest on the market, but the 30 basis point hike now sees the new rate at 2.19%. Westpac also raised its five-year fixed loan rate from 2.19% to 2.49%.
The last two months have seen 24 Australian lenders hike at least one four-year fixed rate, leaving just six now offering rates below 2%. NAB is the only big four bank to offer less than 2%.
Rate City research director Sally Tindall said Westpac’s 1.89% four-year rate was consigned to the history books.
“With a cash rate hike on the cards in 2024 and the RNA’s term funding facility wrapping up in a couple of months, the bank’s record-low four-year fixed rate was unsustainable,” she said. “It’s hard to see a major bank dropping its four-year fixed rate this low for a very long time, if ever.
“While the majority of banks’ three-year fixed rate changes are still cuts, rather than hikes, the tide could turn later this year as the economy continues to recover.
“The cost of funding is likely to increase in coming years, so it’s no surprise lenders are starting to factor this in.”
Any future rate hike would be a momentous occasion, however, as the RBA has not raised rates for over a decade. The last rate hike was all the way back in 2010, when Australia was still experiencing the fallout from the GFC.