RBA Holds Cash Rates at Historic Low

RBA Holds Cash Rates at Historic Low

The Reserve Bank of Australia (RBA) has announced it will keep cash interest rates at the historic low of 0.1 percent in the wake of its first board meeting in 2021 on Feb. 2.

RBA governor Philip Lowe said that while the economy is bouncing back more strongly than anticipated, with GDP predicted to return to its pre-pandemic level 6 to 12 months earlier than previously expected and the unemployment rate looking at dropping further, the outlook for wage and inflation growth remains weak.

“The CPI increased by just 0.9 percent over the year to the December quarter and wages (as measured by the Wage Price Index) are increasing at the slowest rate on record,” Lowe said.

He also said that the RBA expects both to remain below 2 percent over the next couple of years.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range,” he noted. “ The board does not expect these conditions to be met until 2024 at the earliest.”

Lowe reiterated the central bank’s position to keep money cheap and Australian dollar low when addressing the National Press Club on Feb. 3.

“We’re going to keep the monetary support going until people have jobs and firms have to pay high wages to get the workers they need,” he said. “I’m confident that that will eventually work, but we have to be patient.

The central bank holds that “significant fiscal and monetary supports” remain crucial to a sustained recovery.

In line with this stance, the RBA has also decided to continue with other tools that have kept funding costs low and facilitated the supply of credit. These include purchasing an additional $100 billion of government bonds at the completion of the current quantitative easing (QE) program in mid-April.

The RBA’s announcement came amidst a swathe of statistics demonstrating brisk economic recovery led by booming property markets, thanks to unprecedented fiscal and monetary stimulus.

ABS figures released on Feb. 3 showed building approval for freestanding houses jumped by 15.8 percent in December 2020,  up 56 percent over the year to a record high.

The CoreLogic report on Feb. 1 also reveals that the country’s median house prices have climbed to their highest level on record, with every capital city experiencing an increase through the first month of the year.

The momentum has raised concerns over potential property bubble. However, Lowe said he hadn’t seen anything unsustainable with the current house market dynamic.

“Am I worried about asset prices rising too quickly? At the moment, not essentially so,” he said, explaining that the national house price index today is where it was four years ago, and the equity market is just back to where it was at the beginning of last year.

Instead, he views the assets price increase at the moment as a contributor to ongoing economic recovery. This would encourage spending through positive wealth effects and additional residential construction.

However, Lowie said the central bank was monitoring lending standards closely. “We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment.”

Last year RBA cut the nation’s cash rate three times in response to the economic downturn induced by the CCP (Chinese Communist Party) virus, commonly known as the novel coronavirus. In February 2020, interest rates sat at 0.75 percent, and has dropped 65 basis points within 12 months.

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