RBA low cash rate remains, but for how long?

Mortgage holders can breathe a sigh of relief; interest rates are likely to remain low, at least for the time being.

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Earlier today, the Reserve bank held its March meeting on monetary policy where it elected to leave the cash rate on hold at 0.10%, where it has stood since Melbourne Cup Day.

But while today’s decision was largely anticipated, the central bank and the financial markets appear to be at odds over when rates could rise again.

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Last year, RBA Governor Philip Lowe famously said rates would not move for at least three years. Although today’s decision falls in line with that rhetoric, the markets appear to be telling a different story – one where economic improvement could see rates rise earlier than anticipated.

“The RBA’s commitment about the cash rate staying where it is an expectation, it’s not a pledge,” ANZ Head of Australian Economics, David Plank told the ABC.

“So, if the data does do much much better than expected, maybe the cash rate will rise before 2024.”

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Aussie dollar faring well

Contributing to talk of a potential forward shift in interest rates, last week the Australian dollar reached a 3-year high, climbing to above 80 US cents.

The rise signals marked economic improvement, and the increased price of iron ore, business confidence following the arrival of the COVID vaccine and the falling unemployment rate are all believed to be contributing factors.

But its rise in value is not expected to stop there. Analysts at both ANZ and Commonwealth Bank expect the Australian dollar could reach as high as 82 US cents by the end of the year.

According to ANZ’s David Plank, economic improvement could potentially mean an interest rate hike sooner rather than later for fixed rate mortgages.

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The possible end of the RBA’s Term Funding Facility in June – a pool of bank funding established in March last year to encourage lending to households and businesses – is expected to contribute to this.

“Fixed rates are influenced by where market rates are. The key there, though, for fixed rates is really the Term Funding Facility (TFF),” Mr Plank told the ABC.

“The TFF is an anchoring point for the cost of funding for three years and so that is really setting the three-year mortgage rate.

“So when the TFF [ends], which the RBA has signalled could happen at the end of June, I would expect to see fixed rate mortgages rise as a consequence of that.”

Wage growth rebounds

Take-home pay has also seen a boost, with Bureau of Statistics (ABS) data for the December quarter revealing a rebound in wage growth.

Pay packets increased 0.6% in the three months ending 2020, the modest growth defying previously low expectations. In the previous quarter, wages grew just 0.1%.

Wages data rebounds in Q4 after recent weakness, will add to the belief that the #RBA will need to wind back policy sooner than it has outlined but it may just be a one off #ausbiz pic.twitter.com/rusyWmvGfW

— Alex Joiner (@IFM_Economist) February 24, 2021

Annually, the pace of growth remained at a historically low 1.4%. Still, this was higher than the 1.1% private sector economists thought it would drop to.

“December quarter’s moderate growth was influenced by businesses rolling back short-term wage reductions, returning wages to pre-COVID levels,” said ABS Head of Prices Statistics, Michelle Marquardt.

“The phased implementation of the Fair Work Commission annual wage review also had a small positive impact on wages.”

The income lift was felt most heavily in the private sector. Private sector wages rose 0.7% over the quarter, outpacing the public sector rise of 0.3%, where wage freezes had an impact on earnings.

Words by Kathryn Lee

Sources:

• The ABC: Why the Australian dollar is rising – and what that’s got to do with your mortgage repayments
• The Australian: Aussie dollar bursts through US80c at three-year high
• ABS: Wage Price Index December 2020
• ABS: Wage Price Index September 2020
• The Australian: Wages lift in December quarter as firms reverse COVID-era pay cuts

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