During June’s Monetary Policy meeting the Reserve Bank of Australia (RBA) announced that it will hold the official cash rate at 0.1%.
The decision comes as no surprise as the RBA remains committed to holding the cash rate until inflation is comfortably between the 2 and 3% range.
RBA Governor Philip Lowe said that for the rate to be lifted the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently.
“This is unlikely to be until 2024 at the earliest,” he said.
Dr Lowe said that although Australia’s economic recovery has been stronger than expected, wage growth and inflation will likely remain modest.
“Despite the strong recovery in economic activity, the recent CPI (Consumer Price Index) data confirmed that inflation pressures remain subdued in most parts of the Australian economy.”
“In the short term, CPI inflation is expected to rise temporarily to be above 3% in the June quarter because of the reversal of some COVID-19-related price reductions,” Dr Lowe said.
“Inflation in underlying terms is expected to be 1.5% 2021 and 2% in mid-2023,” he said.
Although the RBA appears to be unwavering on their 2024 rate rise deadline, they have already begun to roll back some emergency monetary support.
Dr Lowe announced in the May monetary policy decision that the banks had until June to access the cheap three-year funds offered as part of the RBA’s term-fund facility.
Economists expect that the RBA will retain the three-year target of the April 2024 bond rather than shifting it out to the next maturity, the November 2024 bond.
Why is the RBA reluctant to raise the cash rate despite rising house prices and the demand for housing growing?
Despite a booming property market, the RBA is hesitant to raise the cash rate to ease house prices.
In a speech addressing monetary policy during the pandemic, RBA Deputy Governor Guy Debelle said that changing monetary policy could ultimately cost jobs, and the surging market should be addressed with other policies, not the cash rate.
“There are a number of tools that can be used to address the issue. But I do not think that monetary policy is one of the tools,” he said.
Mr Debelle said the cash rate is used to set employment and inflation.
“While housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus,” he said.
How is the property market being affected by low rates and rising house prices?
The RBA’s record-low cash rate has undoubtedly played a massive role in Australia’s booming property market.
The RBA acknowledged their influence in the March 2021 RBA Monetary policy meeting, sighting low-interest rates as one factor affecting the market.
“Alongside lower interest rates, national housing market conditions had been supported by the recovery in the labour market and fiscal policy measures that had boosted household income and incentives for housing construction,” they said.
Despite soaring house prices, demand in the market is hardly slowing.
According to RateCity Research Director Sally Tindall homeowners are still borrowing in order to take advantage of low fixed rates.
“Lots of people are taking on larger loans at the moment — larger amounts of debt as they’re fixing at record low rate,” she said.
Although rising prices may have slightly cooled the market in 2021’s first quarter, a return of investors is expected to continue to fuel the boom.
CoreLogic’s Head of Research Tim Lawless said that March saw a 13% increase in investor borrowing.
Why are lenders/banks increasing their fixed interest rates?
Banks are increasing their fixed interested rates due to the end of the RBA’s term fund facility.
The RBA implemented the $200 billion funding scheme to dampen the economic effects of COVID-19.
As the scheme comes to an end, banks are slowly beginning to increase their fixed rates, with the Commonwealth Bank raising its 3-year rate by 0.5% on 21st May 2021.
As the term fund facility comes to an end in June, banks will return to relying on wholesale markets for their funding, ultimately increasing funding costs, which will continue to be passed onto their customers through fixed-term rates.
Under the current scheme, banks can borrow from the RBA at an interest rate of 0.1%.
According to Principal of ADCM Services Philip Bayley the end of the scheme could mean banks nearly tripling their funding costs.
“I think we can expect to see mortgage rates moving up gradually after the 30th of June,” he said.