Is the RBA winding back support with July decision?

The Reserve Bank of Australia (RBA) held its scheduled monthly Board meeting on 6 July to discuss interest rates. While the decision on rates was easy to digest, some of the post-meeting reporting and commentary may have left some confused. Specifically, these comments were around the RBA’s change to its bond-buying program. A program that is part of monetary policy and was ramped up in early 2020 as part of a general COVID-19 stimulus package.

The bond-buying program involves the RBA buying Government bonds which is essentially injecting money into the economy. Over the past 18 months the RBA has adhered to a policy as set but in the July announcement, stated its intentions to start winding back the programme from September. This is winding back of emergency support and is considered an indication that the RBA has a positive outlook for the economy. The RBA Governor Philip Lowe stated in his post-meeting media conference that the RBA sees the economy moving from the COVID-19 recovery phase into a phase of expansion. The positive talk should be spark increased optimism especially for businesses and individuals that were under restrictions and lockdowns at the time. Click here for more information.

We report on the RBA’s July decision on interest rates and what it may mean to your finance and loans.

RBA July Announcement

At the July 2021 meeting, the RBA made three key announcements:-

  • To hold the cash rate at 10 basis points (0.1%) and the exchange settlement rate which applies to banks and lenders at 0%
  • Retain the April 2024 bond as the bond for the yield target
  • Continue the bond purchasing program beyond September into mid-November but reduce the weekly rate to $4 billion

The RBA considers that these are measures required to provide continued monetary support to the economy during the transition to an expansion phase from the current recovery phase. Full employment and target inflation in the 2-3% range remain the Board’s commitment.

In the July statement, the RBA again said that the Australian economy recovery is stronger than had been expected and this recovery is expected to continue. Both households and businesses are in a good position in terms of their balance sheets.

The uncertainties surrounding recent coronavirus outbreaks and the restrictions put in place were noted. However, it was also noted that previous experiences had shown that once these outbreaks were contained and relevant restrictions lifted, a bounce back in the economy was quick.

With the May unemployment figure at 5.1%, the labour market was also recovering at a faster pace than previously expected. But job vacancies are elevated with many businesses reporting labour shortages especially in the areas which are impacted by international border closures.

Wage growth and inflation have remained subdued and while the RBA expects a pick-up in these areas it is forecast to be modest and quite gradual. The Governor, Philip Lowe, mentioned in his post-meeting comments that the RBA was still focused on an inflation rate of 2-3% as an indicator to lift interest rates. He noted that any lift in rates would be linked to inflation and not to wages growth but that sustained inflation was related to sustained growth in wages.

Low funding costs would be supported by keeping interest rates low by maintaining the target rate at 0.1%. Dr Lowe said the bond program had an important role in support of the economy. The RBA responded to the stronger economic recovery by reducing the weekly amount of bond purchases and would conduct another review of the position in November.

The strength of the housing market received a mention in the RBA statement, in particular the rise in prices in major housing markets. Noting demand from investors as well as owner-occupiers and first home buyers. As mentioned in the June statement, the RBA will be continuing to monitor this trend in housing borrowings and stressed the importance that the standards of lenders were maintained.

In welcome news for our customers, the RBA left the cash rate on hold and reiterated its previous intentions to wait until the target inflation of 2-3% is achieved before considering a rise. While this is not expected until 2024, there was a noticeable subtle change in wording around this. Previous comments have said ‘at least’ 2024 while the July statement said ‘before 2024’. A subtle change definitely was noted by many economic reporters and analysts.

Outlook for Lenders

For our Jade Finance customers, the interest rates on both consumer and business finance should not change as a result of the RBA’s July decision. All existing contracts which we have secured at fixed interest rates remain constant and unchanged for the term of the loan.

Those considering taking on a loan can look to achieving our cheap and fixed interest rate now and retain that low rate over the full, up to 7 years of their loan contract. This would protect against any rises in interest rates in the coming years.

We note mentions in some media reports that some lenders have already lifted some of the home mortgage lending rates over the past month. Please note that the home mortgage loans are structured differently from the business and consumer loans which we offer and an increase in home mortgage rates should not be seen as an indicator that rates may necessarily also change on our loan portfolio.

The RBA is next scheduled to meet in early August and that will be following an extended lockdown in Sydney and will also take into account current job and inflation figures.

For quotes on business and consumer finance contact Jade Finance 1300 000 008