The central bank has revealed its cash rate decision for May ahead of the federal budget on 11 May.
The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 0.10 per cent for May, aligning with its position of leaving rates unchanged for the foreseeable future.
In his statement on the RBA’s decision, governor Dr Philip Lowe said that it has maintained its current policy settings, including the yield on the three-year Australian government bond, as well as the parameters of the term funding facility.
Dr Lowe said that the economic recovery has been stronger than expected and is predicted to continue, particularly in employment, with unemployment figures falling further to 5.6 per cent in March and the number of people with a job now exceeding pre-pandemic levels.
The RBA expects the unemployment rate to be around 5 per cent at the end of the year and around 4.5 per cent at the end of 2022. It also said the 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 expected in 2022.
However, noting the Australian Bureau of Statistics (ABS) data revealing that CPI rose by only 0.6 per cent this quarter, Dr Lowe said: “Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy.
“A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1.5 per cent in 2021 and 2 per cent in mid-2023. In the short term, CPI inflation is expected to rise temporarily to be above 3 per cent in the June quarter because of the reversal of some COVID-19-related price reductions.”
Dr Lowe also said that house prices have risen in all major markets while housing credit growth has picked up, with strong demand from owner-occupiers, particularly first home buyers (FHB).
“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 said.
The board also announced that it will not extend the term funding facility, which is due to expire on 30 June. Dr Lowe said that authorised deposit-taking institutions (ADI) have drawn $100 billion so far and a further $100 billion is currently available.
“Given the facility provides funding for three years, it will continue to support low funding costs in Australia until mid-2024,” Dr Lowe said.
Budget could change RBA’s stance: Finsure
Commenting on the RBA’s May rate decision, aggregator Finsure managing director John Kolenda said the impact of the upcoming federal budget on 11 May could significantly influence the RBA’s predictions about the direction of rates.
While the RBA has stated in the past that it does not expect to lift rates until 2024 or later or until inflation increases to between 2 per cent and 3 per cent, Mr Kolenda said that this stance could change if the economy “soars” amid continued growth, lower-than-anticipated unemployment, and further stimulus measures expected in the federal budget.
“While the inflation data we are seeing remains subdued, the RBA has been maintaining its stance that rates will not be moving up for a few more years, which provides continued comfort for mortgage-holders,” he said.
“Despite the removal of the federal government support stimulus in response to COVID-19 such as JobKeeper payments, the national unemployment rate remains encouraging.
“The economy has bounced back from the pandemic in pretty good shape. The RBA will now be awaiting the impact of measures in next week’s federal budget, which could further boost the economy and lead to a review of its rate rise forecasts.”
Mr Kolenda also noted that lenders have been lifting their long-term fixed mortgage rates while the official cash rate has remained unchanged, and as such, suggested that consumers should consider a fixed rate option for their home loan.
RBA targets have not been met
Home Loan Experts’ CEO, Alan Hemmings, said the economic conditions the RBA is aiming for has not yet been met and is unlikely to be met before the end of 2021 or mid-2022.
“While we’ve seen the property market heat up significantly this year, the reduction in clearance rates we saw in April suggests the market is still following traditional cycles and isn’t out of control. Employment rates are stabilising, but I believe there is still a way to go before we will see a cash rate increase.”
Loan Market executive director Andrea McNaughton said the RBA held the official cash rate as it waited to see the market impacts of the federal budget. She added that since 2016, the RBA board has not changed the cash rate on the eve of the May federal budget.
Ms McNaughton also noted that federal Treasurer Josh Frydenberg has indicated that the budget will be focused on stimulating jobs growth rather than reducing the COVID-19-induced budget deficit as the government aims to drive the national unemployment rate below 6 per cent.
While stating that the economy is performing strongly, she said that the RBA had reiterated that it would like to see inflation reach its target and unemployment below 6 per cent before increasing the cash rate.
“Also influencing the RBA’s decision to hold the cash rate was a rise in new property listings as sellers sought to take advantage of current market prices,” Ms McNaughton said, adding that Loan Market affiliate Ray White recorded $6.1 billion in sales in March, which it said was its best monthly result in every state market.
However, she said that she did not foresee buyer demand declining in the near future.
Mortgage Choice CEO Susan Mitchell said the monetary policy response has remained “dovish” in recent months.
“Meanwhile, the unemployment rate is still a long way off the RBA’s target, and wages growth remains lacklustre, so it will be interesting to see what position the board takes in the May Statement on Monetary Policy later this week,” she said.
“All eyes will now turn to the release of the federal budget next week to see what further measures will be announced to support the economy.”
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[Related: RBA makes cash rate call for April]
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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