Westpac: RBA cash rate to remain unchanged until 2023

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Australia's cash rate will hold at 0.25% for at least three years, according to economists at Westpac.

After five rate cuts in just under a year, the Reserve Bank of Australia (RBA) said the cash rate has reached its floor, indicating it was not prepared to move into negative interest rates. 

While more cuts are out of the question, Westpac chief economist Bill Evans said a rise is also unlikely. 

"We expect that the overnight cash rate is unlikely to be lifted before December 2023," Mr Evans said.

"However, as discussed above, that does not necessarily mean that the Bank will not adjust the bond yield target over this period." 

With the RBA implementing quantitative easing for the first time ever following the second March rate cut, the central bank has been buying billions of dollars of bonds in the secondary market. 

This indirectly helps fund the Federal Government's $200 billion stimulus package and pushes the cash rate lower, making it cheaper for the Government and everyday Australians to borrow cash. 

The RBA has stated it was implementing quantitative easing with a three year bond yield target, which Mr Evans said reiterates the central bank won't lift the cash rate for some time. 

"The choice of the three year bond target rate as the same as the cash rate target is strategic since it sends a clear message that if the Bank is prepared to purchase three year bonds at the overnight cash rate it is reasonable to expect that it is comfortable with the cash rate holding at 0.25% for the full three years," he said. 

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Mr Evans stressed that a rise in the cash rate would indicate confidence in the economy from the RBA, something that would only be achieved when progress was made on unemployment. 

"The most important forecast will be the unemployment rate. Unemployment is a key policy goal in its own right and the most important influence on inflation through the impact that spare capacity in the labour market has on wages and therefore inflation," he said. 

"We expect that the unemployment rate will hold around 6% in 2021–2023 – well above the 4.5% full employment rate.

"Accordingly wages growth, which we expect will slow to an annual pace of 1.5% by mid-2021 will fail to return even to the disappointing 2.5% we experienced before the advent of the Covid Crisis." 

Mr Evans' predictions mirrored the RBA's, with Governor Phillip Lowe stating he believed the unemployment rate would hold above 6% for the next couple of years.

Both parties also predicted a sharp contraction in the economy in 2020 of around 10%, but differed in the forecast for 2021 growth.

The RBA forecasts a growth of 6-7%, while Westpac is less optimistic at 4%. 

"Westpac expects that growth in the Australian economy will slow back to potential from the second half of 2021," Mr Evans said.

"Labour markets are slow to heal following economic crises.

"After twelve years the Australian labour market had not returned to the pre GFC unemployment rate of 4%. The deterioration in the underemployment rate was more severe.

"Both factors are likely to be apparent in the post-Covid period." 

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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

• The big four banks are: ANZ, CBA, NAB and Westpac
• The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
• The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
• If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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