RBA holds cash rate at 0.10% for July, plays down early rate hike

author-avatar By on July 06, 2021
RBA holds cash rate at 0.10% for July, plays down early rate hike

Australia's central bank has left the cash rate unchanged at 0.10% for July.

Much of the discussion prior to the Reserve Bank (RBA) meeting was whether it would indicate a rate hike earlier than expected. 

But RBA Governor Dr Phillip Lowe said the central bank still does not expect to raise rates in the next three years.

"The Board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target," Dr Lowe said.

"It will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range.

"The Bank's central scenario for the economy is that this condition will not be met before 2024.

"Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently."

But economists from all of the big four banks are betting against the RBA, with Westpac forecasting the cash rate will sit at 1.25% in 2024, 115 basis points higher than where it sits today.

The RBA's affirmed stance comes as unemployment is faring considerably better than what they had forecasted. 

The unemployment rate currently sits 5.1%, with many economists predicting it will drop to 4.5% (full employment) by the end of the year. 

The RBA had previously forecast the rate would still be at 5% by year's end. 

Callam Pickering, APAC economist at Indeed, said the RBA wouldn't be influenced by forecasts, instead relying on concrete data.

“A key uncertainty for policy is the imprecise relationship between labour market tightness and wage growth," Mr Pickering said.

"We don’t know whether a 5% or a 4.5% or a 4% unemployment rate will be sufficient to drive wage growth towards 3% or higher.

"And without knowing that relationship, it is folly to predict the path of policy with any certainty.”

Carefully watching the house price boom 

Dr Lowe said the central bank recognised property prices were reaching record heights in most of the country and said it would be ensuring responsible lending was still occurring. 

"Housing markets have continued to strengthen, with prices rising in all major markets," he said.

"Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

"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." 

Experian’s ANZ General Manager of Decision Analyics, Mathew Demetriou, said the roaring demand for home loans was likely to continue. 

"Even pre-pandemic, Australian businesses considered the increasing volume of loan applications a challenge – 8 in 10 according to our research," Mr Demetriou said.

"This influx of loan applications stemming from record-low cash rates continues to put a strain on lenders, and with the RBA cash rate remaining as is for now, it's likely this demand for loans will remain high.

"For lenders, approval processes need to be fast or they run the risk of customer dissatisfaction."


Image source: RBA.

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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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