12 Apr 2022

RBA Keeps Rates on Hold at 0.1%

At its meeting today, the central bank’s board decided to maintain the cash rate target at 0.1% and the interest rate on Exchange Settlement balances at 0%. For full details of the monetary policy decision on 5 April 2022, refer to the bank’s media release.

No RBA rate rise decision as yet

“No surprise that interest rates were kept on hold today, although the RBA did nod to the growing possibility of interest rate rises in the near future.”, says SF Capital Managing Director Tommy Lim, who reads this as “only a matter of time, and the RBA is cautiously priming the market as it holds its hand over the trigger.”

In his commentary, Tommy refers to these two key quotes in Reserve Bank Governor Philip Lowe’s statement:

Bond yields have risen and expectations of future policy interest rates have increased

The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates

Important data is expected in the coming months on “both inflation and the evolution of labour costs” to help the RBA decide whether to go ahead or postpone its decision to raise interest rates.

Lim’s other key takeaways from the rate decision announcement are as follows:

  1. Inflation is increasing around the world, although relatively lower in Australia. This is being driven by ongoing supply-side issues and the post-pandemic recovery increasing demand. Australian headline inflation sits at 3.5%, underlying inflation at 2.6% – with high inflation likely to persist due to rising petrol, energy and commodity price
  2. The Labour Market is close to full employment, with unemployment falling to 4% in February, and likely to fall below 4% this year. The RBA is taking this as a sign of a strong economy. I do question however whether this is due to less workers in the market (expats, working visas, students etc).
  3. Despite the strong labour market, wages growth remains slow. Rises are not consistent across the board (industries, geographies, professions) and are expected to be gradual, although “there is uncertainty about the behaviour of labour costs at historically low levels of unemployment”
  4. Financial conditions (i.e. flow of credit) has remained “highly accommodative”. While interest rates remain at historically low levels, fixed mortgage rates have risen and it is important that “borrowers have adequate buffers”
  5. Overall, the Australia economy is performing well post Omicron outbreak. Household balance sheets are healthy (good savings / equity relative to debt), there is increasing business investment and a strong construction pipeline. National incomes are being further boosted by higher commodity prices, although households budgets are under pressure from rising prices and many communities experiencing hardship from the recent floods.

“It will be very interesting how the rest of the year plays out,” says Lim who is going to keep everyone updated in this space.

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