- The Reserve Bank of Australia (RBA) has kept the official cash rate on hold at 0.10% at its May meeting.
- While the RBA is now forecasting a stronger recovery and full employment to be achieved in two years, it isn’t expected to touch interest rates for a few years yet.
- Economists believe though it will begin to soften its language later this year, with the RBA unlikely to keep its word of making it to 2024 without a hike.
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The Australian economy is expected to bounce back far better than first forecast, but the country’s central bank isn’t in a rush to dial back support.
On Tuesday, the Reserve Bank of Australia (RBA) kept the official interest rate at 0.10% as widely expected but revealed an even rosier outlook.
“The economic recovery in Australia has been stronger than expected and is forecast to continue. This recovery is especially evident in the strong growth in employment, with the unemployment rate falling further to 5.6% in March and the number of people with a job now exceeding the pre-pandemic level,” RBA Governor Philip Lowe said in his monthly statement.
“The Bank’s central scenario for GDP growth has been revised up further, with growth of 4.75% per cent expected over 2021 and 3.5% per cent over 2022. A pick-up in business investment is expected and household spending will be supported by the strengthening in balance sheets over the past year. The unemployment rate is expected to continue to decline, to be around 5% at the end of this year and around 4.5% at the end of 2022.”
A quicker path back to full employment is obviously good news, with the RBA hoping strong wage growth will eventually follow as a result. With more money in their hip pocket, the central bank is optimistic Australia’s economy can grow at rates not seen in years on the back of elevated demand and spending.
If its outlook is accurate, it will also present problems for the RBA which has told the Australian public interest rates won’t be hiked “until 2024 at the earliest”. In the midst of the pandemic, staring down the country’s first recession in three decades, the certainty such statements provided were useful in shoring up consumer confidence to borrow and spend.
The impact of that has been obvious, as lending records continue to be broken month-on-month fuelling a monster house price rally right around the country. The prospect that this may be unsustainable has not yet worried regulators or policymakers, although Lowe has repeatedly said his board were keeping an eye on the growth in household debt for warning signs.
“Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” he added on Tuesday.
With riskier first homebuyers predominantly driving lending growth, a stronger than expected rebound could potentially put the RBA in an uncomfortable position. If the economy begins to overheat, and other countries begin raising interest rates, it would increasingly pressure the RBA to do the same. The Bank of Canada has already suggested it could hike rates as soon as next year.
While the hike is still a couple of years off, according to CreditorWatch chief economist Harley Dale, Australia likely won’t have to wait until 2024.
“The RBA mantra is intact – we won’t be seeing a rise in interest rates for a very long time. That said, history tells us the first increase in interest rates always occurs at a different point in time than early forecasts,” Dale said.
Others, like the Bendigo Bank’s David Robertson, said it could come by late 2022, “dependent on the pace and success of vaccination programs”.
Doing so in Australia would place greater financial stress on new borrowers who have taken on large debts in order to afford record property prices, expecting several years of cheap credit in doing so. Cheaper borrowing costs have not only enabled Australians to pay back less, but to also borrow more — although significantly many existing borrowers have built up a repayment buffer as a result.
“The last six months saw the highest amount borrowed to purchase housing over any six month period in history. What economists have told us is that the next six will be record-breaking,” Finder head of consumer research Graham Cooke said. “While low rates mean lower repayments, tread cautiously – if you overextend yourself and rates rise, you may find you have a tiger by the tail.”
In a note issued before Tuesday’s rate decision, ANZ economists revealed they think RBA could reassess its three-year timeline in the second half of 2021.
“In our view, the most likely date for this decision is the RBA’s August meeting, though Governor Lowe has a key speech in July where he may provide a clear signal of intent about this and also the likely size of the QE extension that we expect to occur when the current one ends,” economists Brian Martin and Daniel Hynes wrote.
This could still only bring the central bank in line with markets which are expecting a 2023 hike. For this to happen, Janus Henderson investment strategist Frank Uhlenbruch says the RBA will want unemployment “close to 4%”, inflation at or above 2%, and wages growth at 3%. It’s a mighty wish list given the RBA notes inflation in particular isn’t expected to hit 2% until “mid 2023”.
Of course, there could be a different sort of intervention in the property market in the interim. Across the Ditch, New Zealand’s Reserve Bank brought in severe lending restrictions to curb its red hot property market after 20% price growth last year.
The possibility remains the RBA and regulators could work to do the same in Australia, at least restricting the amount of new debt that could be issued and reducing the impact of a potential hike further down the track — although the Commonwealth Bank doesn’t believe the prospect is pressing.
“The RBA and APRA are watching developments in the housing market but both have stressed that the focus is on lending standards and financial stability issues rather that house price movements. Lending standards still look sound and we don’t expect any macro‑prudential policies to be reintroduced this year,” senior economist Kristina Clifton said on Tuesday.
For now though, a burgeoning recovery has bought the RBA time to watch and see how the economy progresses.
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