Despite surging house prices, the Reserve Bank will continue to keep interest rates steady.
At its April monetary policy meeting earlier today, the central bank elected to keep the cash rate at 0.10%, where it has stood since Melbourne Cup Day in November last year.
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The hold was despite talk that the RBA may be forced to act to address raising house prices.
Speaking at the Australian Financial Review Business Summit in early March, RBA Governor Dr Philip Lowe reaffirmed the central bank’s stance on monetary policy and house prices, and when it expects interest rates to rise.
“I would like to reiterate that the RBA does not target housing prices, nor would it make sense to do so,” Dr Lowe said.
“I recognise that low interest rates are one of the factors contributing to higher housing prices and that high and rising housing prices raise concerns for many people. There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages.”
Dr Lowe said that despite climbing property prices, the cash rate is likely to remain low until 2024 since it is unlikely that wage growth will reach greater than 3% before that time.
“Predicting how long [wage growth] will take is inherently difficult, so there is room for different views. But our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024,” he said.
“This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”
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Fixed-rate lending popular as low rates continue
Lenders are continuing to offer record low interest rates but evidence suggests that long-term, they may be preparing for hikes.
Westpac was first, dropping its two-year fixed rate home loan to 1.79% p.a. NAB followed, reducing its product to 1.89% p.a. (down from 2.04% p.a.).
CBA was last, lowering its two-year fixed rate wealth package home loan to 1.94% p.a.
But though short-term fixed rates are having their time in the sun, lenders are slowly increasing interest rates on longer fixed-rate terms.
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While CBA lowered its short-term rate, it took the opportunity to raise its four-year fixed rate by 0.2 points to 2.19% p.a. The bank cited higher funding costs as its reason for the rise.
The Bank of Queensland, Bendigo Bank and Adelaide Bank also increased four-year rates during the month.
NAB chief economist Alan Oster said while he expects the pricing of two-year loans to remain aggressive, a rise in bond yields this year would likely drive up long-term fixed rates.
“There’s been quite a big blowout in four and five year pricing. My guess would be that the price of four and five-year [loans] would eventually go up,” Mr Oster said.
Recently, the popularity of fixed-rate mortgages has surged. In the past, Australians have opted for variable-rate home loans, with about 15% of new home loans being fixed.
Since mid-2020, this proportion has jumped to 40%.
A quirk of timing means that refinancing of the surge in fixed rate mortgages may amplify any RBA move in 2024. https://t.co/bmwJx4MQLT— David Plank (@DavidPlank12) March 25, 2021
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JobKeeper End Fuels Economic Speculation
A year on from its establishment on 30 March last year, last week the JobKeeper wage subsidy came to an end. It is still unknown how its conclusion will impact unemployment.
Secretary to the Treasury, Dr Steven Kennedy believes it could prompt a brief rise in unemployment.
During his opening statement to the Economics Legislation Committee in March, Dr Kennedy told senators that the end of JobKeeper could prompt 100,000 to 150,000 recipients losing employment.
BREAKING: Treasury expects 100,000 – 150,000 Australians will lose their jobs after Morrison & Frydenberg cut #JobKeeper this weekend. If they hadn’t wasted hundreds of millions on companies which didn’t need JobKeeper, there’d be room to support those which still do. #auspol pic.twitter.com/f6dkU7JOSD— Jim Chalmers MP (@JEChalmers) March 23, 2021
However, he also said that he believed the adjustment would be manageable, and that on a whole, unemployment is likely to keep falling.
“Our view is that the adjustment away from JobKeeper will be manageable, and that employment will continue to increase over the course of this year, although the unemployment rate could rise a little over coming months before resuming its downward trajectory.”
Currently, the unemployment rate is at 5.8% after dropping -0.5 points since January.
Words by Kathryn Lee
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- RBA Governor Philip Lowe AFR Business Summit Speech
- News.com.au Half of big four banks now offer two-year fixed home loan rate below 2 per cent, pressure on CBA, ANZ to follow
- Sydney Morning Herald Banks under pressure to lift long-term rates as funding costs rise
- ABS Labour Force survey February 2021
- Opening statement – Economics Legislation Committee
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