The RBA has elected to keep the cash rate on hold at the record low level of 0.25 per cent.
At its June meeting on Tuesday, the board decided to continue with a wait and see approach which was in line with what most analysts had been expecting.
The RBA had slashed the official cash rate from 0.75 per cent in two meetings in March, including one emergency meeting on the back of the widespread social distancing measures that shut down large segments of the economy.
RBA governor Philip Lowe said the decision to keep rates on hold was made as many countries around the world begin to recover from a “severe downturn”, thanks to measures made to contain the spread of Covid-19.
“Many people have lost their jobs and there has been a sharp rise in unemployment,”Dr Lowe said.
“Notwithstanding these developments, it is possible that the depth of the downturn will be less than earlier expected.
“Over the past month, infection rates have declined in many countries and there has been some easing of restrictions on activity. If this continues, a recovery in the global economy will get under way, supported by both the large fiscal packages and the significant easing in monetary policies.
“Globally, conditions in financial markets have continued to improve, although conditions in some markets remain fragile. Volatility has declined and credit markets have progressively opened to more firms. Bond rates remain at historically low levels.”
Dr Lowe suggested that rates would remain low until there was progress made in reducing unemployment and boosting inflation.
“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band,” he explained.
Low rates support housing
Head of Research at CoreLogic, Tim Lawless felt that moves by the RBA have helped prop up house prices.
“The low cash rate setting is one factor helping to support housing market conditions. Owner-occupier mortgage rates are averaging less than 3 per cent and the most competitive rates are close to the 2 per cent mark,” Mr Lawless said.
“Alongside significant rate reductions, reports are emerging of banks offering extended interest-only periods and allowing customers to pivot to interest-only repayment schedules.
“This kind of policy is likely to become more widespread later this year, as ‘mortgage holiday’ periods end and government stimulus measures taper.
“Such a low cost of debt, along with improving consumer sentiment and an easing in social distancing policies were factors supporting an 18.5 per cent rise in housing activity through May, after sales plunged by about 33 per cent nationally in April.
“The low rate setting and improving level of market activity also partially explain why housing values have fallen by less than half a per cent through the Covid-19 crisis to date. “
Consumer sentiment rebounding
Mortgage Choice Chief Executive Officer, Susan Mitchell said today’s decision was in line with expectations.
“Today’s decision from the Reserve Bank comes as no surprise when you consider the current economic environment and the fact that the RBA has ruled out negative interest rates.
“The latest data from the labour market made a strong case for today’s decision. After a devastating result in April, which saw almost 600,000 lose their jobs, the unemployment rate rose to 6.2 per cent, far off the RBA’s target rate.
“On the other hand, consumer sentiment made an impressive recovery, with the latest data from the Westpac-Melbourne Institute Index of Consumer Sentiment rebounding in May after plummeting in April.
“The Index is still low by historical standards, however, it is pleasing to see that consumers are less pessimistic about the nation’s road to recovery.”
Mortgage rates at rock bottom
RateCity.com.au research director Sally Tindall said while the cash rate was unlikely to move in the foreseeable future, some home loan rates could drop further as the banks battle it out for new business.
“The big four banks have probably exhausted their capacity to cut fixed rates. Now what we’re seeing is challenger banks trying to outbid them to attract new customers,” she said.
“As a result, rates could fall a fraction further, but they’re unlikely to fall far.
“While the majority of new customer rate changes over the past month were cuts, three-year fixed rates have been the exception, with almost the same number of hikes as cuts.
“In March and April, we saw a handful of non-bank lenders put record low three-year fixed rates on the table but it was clearly unsustainable. Since then, they’ve had to hike rates, which could be a sign we’ve hit the bottom in this category,” she said.