RBA makes final interest rate decision of 2020

RBA makes final 2020 interest rate decision. Source: Getty
RBA makes final 2020 interest rate decision. Source: Getty

The Reserve Bank of Australia has held the official cash rate at a record low of 0.1 per cent, after slashing it in November, as it waits for the effects of the previous cut to kick into gear.

The move was widely predicted by industry experts, with 40 of 40 pundits surveyed by Finder.com.au predicting a hold for December.

“Given that the cash rate is already at 0.1 per cent and the RBA does not want to take it negative, the next move is likely to be a hike,” AMP chief economist Shane Oliver said.

“But given the high level of spare capacity in the economy, inflation is unlikely to meet the RBA’s conditions for a hike of being sustainably within the 2 to 3 per cent target range for another three years or so. As a result, the first rate hike is unlikely until sometime in 2024."

Trading platform CLSA Premium’s Peter Boehm added there was “little justification” for further cuts to the cash rate, saying it’s likely they’ve “reached their floor”.

“This is because the relative success of the Federal Government's stimulus packages combined with various state-based initiatives has carried the economy such that the time has come to focus less on monetary policy, and more on fiscal policy,” Boehm said.

“The last thing the economy needs right now is zero or negative interest rates.”

Home loan rates

As it stands, the average variable home loan rate is 3.31 per cent, while the average two-year fixed rate is 2.35 per cent, according to Mozo.

While none of the big four banks cut their variable rates as a result of November’s interest rate cut, they all made some change to their fixed-rate loans.

Commonwealth Bank reduced its two-and three-year fixed rate home loan for owner occupiers to 2.14 per cent per annum, while Westpac dropped its two-and three-year fixed rates to 2.09 per cent.

Here’s what home loans looked like after the last cut.

Property prices edge higher

The decision follows data from CoreLogic showing Australia’s housing market is well and truly rebounding, with the national house price index increasing 0.8 per cent across the month of November.

While the national index is still below March levels, all capital cities, including Melbourne, recorded property price increases.

According to CoreLogic’s head of research, Tim Lawless, if housing values continue to rise at this rate, we could see prices back up to pre-Covid levels as early as January or February next year.

There’s one caveat to that, though, Lawless said: “The recovery in Melbourne, where home values remain 5 per cent below their recent peak, will take longer.”

RBA Governor Philip Lowe’s full statement:

At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on 3-year Australian Government bonds, as well as the parameters of the Term Funding Facility and the government bond purchase program.

Globally, the news has been mixed recently. On the one hand, infection rates have risen sharply in Europe and the United States and the recoveries in these economies have lost momentum. On the other hand, there has been positive news on the vaccine front, which should support the recovery of the global economy. The recovery is also dependent on ongoing support from both fiscal and monetary policy. Hours worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below central bank targets.

Financial conditions remain accommodative around the world, with bond yields near historically low levels. The positive news on vaccines has boosted equity markets, lowered risk premiums and supported further increases in some commodity prices. The improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.

In Australia, the economic recovery is under way and recent data have generally been better than expected. This is good news, but the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support. In the RBA's central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the central scenario, GDP is expected to grow by around 5 per cent next year and 4 per cent over 2022.

Employment growth was again strong in October, although the unemployment rate increased to 7 per cent as more people rejoined the workforce. A further rise in the unemployment rate is still expected, as businesses restructure in response to the pandemic and more people rejoin the workforce. The unemployment rate is forecast to decline next year, but only slowly and still to be around 6 per cent at the end of 2022.

The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In the September quarter, the Wage Price Index increased by just 0.1 per cent, to be 1.4 per cent higher over the year. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022.

The Board views addressing the high rate of unemployment as an important national priority. Its policy decisions over recent months will help here. These decisions are complementary to the significant steps taken by Australian governments to support jobs and economic growth.

The Bank's policy response has lowered interest rates across the yield curve, which will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility is also supporting the supply of credit to businesses. To date, authorised deposit-taking institutions have drawn down $84 billion under this facility and have access to a further $105 billion. Over the past month, the Bank has bought $19 billion of government bonds under the bond purchase program and a further $5 billion of Australian government securities in support of the 3-year yield target. Since the start of this year, the RBA's balance sheet has increased by around $130 billion.

Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

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