RBA keeps handbrake on cash rate

Big four bank, aggregator share views on official cash rate

RBA keeps handbrake on cash rate

The Reserve Bank of Australia has again held off lifting the cash rate, announcing it will remain at 0.1% in a move widely expected by economists and commentators.

Following the board’s monthly monetary policy meeting held on Tuesday afternoon, RBA governor Philip Lowe confirmed the board decided to keep the cash rate target at 10 basis points and the interest rate on exchange settlement balances at 0%.

The cash rate has sat at a record-low 0.1% since November 2020 and last increased in November 2010.

Read more: Too soon for a cash rate hike?  An economist and aggregator weigh in

Maintaining its pledge of patience on raising rates amid the COVID-19 pandemic, the Reserve Bank said inflation had increased in Australia, but growth in labour costs had been below rates necessary to lift the cash rate.

Lowe said higher prices for petrol and other commodities would result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May.

“The main sources of uncertainty relate to the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs," Lowe said.

Lowe said financial conditions in Australia continue to be highly accommodative.

“The [RBA] Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates.

“Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs.”

AFG Securities general manager Damian Percy (pictured above left) said RBA’s decision to keep the cash rate on hold seemed sensible.

“Though the key economic numbers are very good and household balance sheets are strong, my personal view is that consumer confidence is less robust than the numbers suggest it ‘should’ be, Percy said.

As economic performance is as much of a question of confidence, as of facts, combined with the current global uncertainty, he said the RBA needed to consider the timing and quantum of the “first shot over the interest rate bow” very carefully.

“The prospect of a rise is already taking a little of the wind out of house prices – which is welcome news for buyers – so I think waiting until that particular effect peters out is no bad thing, Percy said.  

Before pushing up the cash rate, Percy expected the RBA would want to see a sustained period of inflation within the 2% to 3% target range, and consistent growth in wages, of a reasonable rate.

“COVID-related supply chain issues and events in Ukraine are obviously muddying the waters for the former [inflation] and we are yet to see sustained growth in the latter [wages], so they’re still maintaining a watching brief as you might expect,” Percy said.

“I’m sure the RBA is alive to the fact that fairly modest increases in interest rates will achieve what it would have taken quite significant and possibly sustained increases to achieve a decade ago.  I expect them wait until the inflation and wages trends are clear and then move incrementally and over a longer time horizon than [they] may have historically.”

In early April, NAB and ANZ increased their fixed rates by 0.4 percentage points – the seventh hike in six months for NAB and the fifth hike for ANZ. Data from Rate City released on 4 April, showed fixed rates across the big four banks started from 2.99% (one-year fixed) and 3.19% (two-years fixed), three-year fixed rates from 3.74%.  Variable rates started from 2.09%.

Overall, Percy said borrowers who maintained a market-competitive variable rate were likely to have done better over the long-term than those with borrowing on fixed rates.

“You could argue, successfully I think, that those who fixed during the period when the banks had accessed to subsidised funding via the Term Funding Facility may be the exception for a time, but the old adage ‘fixed for certainty, variable for value’ still stands for mine,” Percy said.

Read more: Reserve Bank keeps interest rates on hold

David Plank, head of Australian economists at ANZ Research (pictured above right) said the RBA’s decision to keep the cash rate at 0.1% shows it feels there’s still a strong case to wait.

It also indicates RBA’s confidence that inflation pressures can be quickly brought under control.

Asked about the indicators RBA would want to see before raising the cash rate, Plank said it’s likely to be stronger wages growth – something RBA has continually emphasised as important. 

He said this made the quarter one wages data, due out before the RBA June meeting, “especially important”.  But rising inflation pressures could also signal an upward move.

“More recently, the psychology of inflation has featured in the RBA’s commentary. We think this is about the behaviour of businesses and workers, rather than expectations. It is possible that a greater willingness by firms to raise prices in order to pass on costs could see the RBA tighten before it has clear evidence of a faster pick-up in wages growth,” Plank said.

Ahead of the RBA’s April monetary policy meeting, ANZ forecasts showed the official cash rate rising to 1.25% by March 2023, and to 2% by the end of next year. Long-term forecasts showed the cash rate rising to 3% or higher, although this wasn’t expected to happen until after the end of next year.

Mortgage Choice national sales director David Zammit said the RBA remained committed to its "wait and see" approach.

"Given this was the first monetary policy meeting since the Federal Budget was handed down, I wasn't expecting the Board to rock the boat," Zammit said.

"However, the implications of the stimulus provided by this budget could see the first rate hike brought forward.

"The first cash rate rise in more than a decade is probably just around the corner. Given there hasn't been a rise in so long, it's more likely to be an incremental and small rise. Most borrowers should be well positioned to absorb any home loan interest rate rises that may occur as a result, but they should speak to their broker if they're concerned."