RBA maintains flexible approach with continued cash rate hold

The Reserve Bank of Australia (RBA) has again opted to keep the nation’s official cash rate on hold at 0.1 per cent.

Given the heightened level of uncertainty from recent COVID-19 outbreaks and subsequent lockdowns, the RBA has acknowledged Australia’s economy is likely to move into reverse through the September quarter.

In addition to keeping the cash rate at an all-time low, the RBA elected to maintain their 10-basis point target for Government bonds and held firm on their intention to taper the bond purchasing program from $5 billion each week to $4 billion in early September.

The RBA is expecting the disruption to Australia’s economic activity and labour markets will be temporary phenomenon, noting the experience to date has been that economic conditions bounce back quickly once the outbreaks are contained and restrictions are lifted

Reserve Bank Governor, Dr Philip Lowe said the Australian economy had enough momentum heading into the most recent outbreaks that growth conditions would return once lockdowns are lifted.

“The economic recovery in Australia has been stronger than was earlier expected. The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter,” Dr Lowe said.

“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year.

“The economy is benefiting from significant additional policy support and the vaccination program will also assist with the recovery.”

However, Dr Lowe also noted the economic outlook for the coming months is uncertain and depends upon the health situation and containment measures. 

Reacting to the RBA’s decision, REA Group CEO, broker Susan Mitchell said the Delta-strain induced lockdowns had reinforced the need for agile fiscal and monetary responses.

“It’s remarkable how quickly the economic outlook can change from one month to the next,” Ms Mitchell said.

“That being said, the economic data released in the lead up to the lockdowns was very strong and we’ve seen the Australian economy bounce back faster than expected from previous lockdowns.”

The RBA also kept their outlook for the cash rate firm, with an expectation that the inflation target will not be met until 2024 at the earliest.

With interest rates remaining on hold for the foreseeable future, CoreLogic research director Tim Lawless said to expect the low cost of debt to continue supporting housing demand.

“While low rates have clearly been a key factor in stimulating housing demand, worsening affordability is tempering demand,” Mr Lawless said.

“With housing values rising substantially faster than incomes, it’s taking prospective buyers longer to save for a deposit and a larger portion of their income is required to fund their transactional costs.”

Outside of monetary policy, Mr Lawless noted there remains a level of speculation that credit policies could be tightened down the track.

The RBA has reiterated it will be monitoring home lending standards for any slippage in credit quality.

“Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers,” Dr Lowe said.

“There has also been increased borrowing by investors. Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

A material lift in low deposit home lending or substantial rise in loans with high debt-to-income ratios could be the trigger for a new round of credit tightening aimed at keeping a lid on household debt.

To-date the messaging from regulators and policy makers has been that lending standards are being maintained, but if the quality of home lending does reduce it could become harder to secure a home loan, especially for borrowers with small deposits or high debt levels relative to their income.

From previous instances of credit tightening, Mr Lawless said this would probably have a more pronounced effect in dampening housing market conditions.

In the meantime, Mr Lawless expected housing markets to remain positive. Advertised supply is around record lows and housing demand will continue to be supported by low interest rates.

He anticipated the rate of growth in housing values to taper through the second half of 2021 and into 2022 due to housing affordability becoming more of a challenge, as well as higher levels of new supply gradually being added to the market against a backdrop of low population growth.

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