27 September 2023

RBA interest rate promise called into question

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David Chau* says the Reserve Bank may be pressured to lift interest rates as early as next year.

Australia’s Reserve Bank has kept the nation’s cash rate at the record low 0.1 per cent, for the 12th month in a row.

It also pledged to continue pumping stimulus into the economy, by purchasing $4 billion worth of government debt each week, until at least mid-February.

But the central bank has dumped one of its key stimulus measures, known as “yield curve control” — which was introduced in March 2020, shortly after the COVID-19 pandemic struck.

It involved the RBA buying billions of dollars in Australian government three-year bonds, which mature in April 2024, to artificially drive their yield (or return) down to 0.1 per cent.

Markets have interpreted this move as a concession from the RBA that borrowing costs may have to rise sooner than expected.

NAB economists predict the first rate hike is “likely” to occur in 2023.

ANZ is more specific, guessing it will happen in the “second half of 2023”.

Economists from Commonwealth Bank and AMP Capital are even more bullish.

Their forecasting shows the RBA lifting interest rates in November 2022.

Last week’s surprisingly strong core inflation figures (2.1 per cent) led to speculation that the central bank would be forced to start winding back its COVID-era stimulus.

The cost of living rose sharply in the September quarter due to record high petrol prices, the increasing cost of building new homes and the global supply chain disruptions.

Lenders hiking fixed term mortgages

After the RBA’s decision, the yield on Australia’s three-year bond slipped to around 0.97 per cent (down 0.03 percentage points).

That is around 10 times higher than where the RBA wants market interest rates to be.

So it has essentially capitulated to market forces with its decision to not buy any more April 2024 bonds (which it previously did for the purpose of driving short-term rates lower).

CommSec senior economist Ryan Felsman said “the lift in short-term market interest rates has already fed through to fixed rate mortgage increases, as overseas interest rates lift with global central banks continuing to tighten monetary policy settings”.

He also warned that “the rollover or refinancing of fixed rate mortgages could eventually see mortgage holders confronted with significantly higher borrowing costs and repayments”.

“That said, increased competition has seen variable mortgage rates fall.”

In the past month, 26 lenders have lifted their fixed rates, “with the majority of rate increases on 2- to 5- year fixed terms”, said Sally Tindall, research director of comparison website RateCity.

Economy’s quick recovery from Delta

“The Australian economy is recovering after the interruption caused by the Delta outbreak,” RBA governor Philip Lowe said in his post-meeting statement.

“As vaccination rates increase even further and restrictions are eased, the economy is expected to bounce back relatively quickly.”

The RBA is expecting the Australian economy to grow by 3 per cent this year, then by 5½ per cent and 2½ per cent in the following two years.

However, he said the RBA’s decision to abandon yield curve control was due to “improvement in the economy” and the “earlier-than-expected progress towards the inflation target” (2 to 3 per cent).

“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”

Dr Lowe has repeatedly said: “The [RBA] Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

“This is likely to take some time.”

Inflation and wage growth to struggle

In previous statements, the governor consistently said rates are unlikely to be lifted “before 2024”.

He did not make that reassurance this time.

However, Dr Lowe attempted to play down rate hike speculation by emphasising that Australians are unlikely to see meaningful pay rises for some time.

“Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.

“The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5 per cent at the end of 2023 and for only a gradual increase in wages growth.”

The Australian dollar fell to 74.87 US cents by 4:30pm AEDT (down by a moderate 0.5 per cent).

*David Chau presents finance segments on the ABC News Channel, and is a multi-platform business reporter in Sydney.

This article first appeared at abc.net.au.

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