Reserve Bank could be forced to raise interest rates as early as next year
The Reserve Bank of Australia kept the country’s treasury rate at a record low of 0.1%, for the 12th consecutive month.
- The central bank has abandoned its efforts to achieve “control of the yield curve”
- This involved the RBA buying three-year government bonds to artificially lower their yields.
- Sharp rise in inflation helped RBA move to reverse COVID stimulus
He also pledged to continue injecting stimulus into the economy, buying $ 4 billion in public debt every week, at least until mid-February.
But the central bank has abandoned one of its main stimulus measures, known as “yield curve control” – which was introduced in March 2020, shortly after the COVID-19 pandemic.
This involved the RBA buying billions of dollars in three-year Australian government bonds, maturing in April 2024, to artificially reduce their yield (or yield) to 0.1%.
Markets interpreted the move as a concession from the RBA that borrowing costs may have to rise sooner than expected.
NAB economists predict that the first rate hike is “likely” to occur in 2023. ANZ is more specific, assuming it will occur in the “second half of 2023”.
Commonwealth Bank and AMP Capital economists are even more optimistic. Their forecast shows that the RBA will hike interest rates in November 2022.
Last week’s surprisingly high core inflation figures (2.1%) have led to speculation that the central bank would be forced to start undoing its COVID-era stimulus measures.
The cost of living rose sharply in the September quarter due to record gasoline prices, the rising cost of building new homes and disruptions in the global supply chain.
Lenders increase fixed-term mortgages
After the RBA’s decision, the yield on the three-year Australian bond slipped to around 0.97% (down 0.03 percentage point). That’s about 10 times higher than what the RBA wants market interest rates to be.
So he essentially capitulated to market forces with his decision not to buy any more April 2024 bonds (which he has done previously in an effort to lower short-term rates).
CommSec Senior Economist Ryan Felsman said that “rising short-term market interest rates have already translated into increases in fixed-rate mortgages, as interest rates at l foreign markets increase as global central banks continue to tighten monetary policy parameters.
He also warned that “refinancing or refinancing fixed rate mortgages could potentially see mortgage holders facing significantly higher borrowing costs and repayments.”
“That said, increased competition has resulted in lower variable mortgage rates.”
Over the past month, 26 lenders have raised their fixed rates, “with the majority of rate increases on fixed terms of 2 to 5 years,” said Sally Tindall, research director for comparison site RateCity.
Rapid recovery in Delta’s economy
“Australia’s economy is recovering after the shutdown caused by the Delta epidemic,” RBA Governor Philip Lowe said in his statement after the meeting.
The RBA expects the Australian economy to grow 3 percent this year, then 5Â½ percent and 2Â½ percent over the next two years.
However, he said the RBA’s decision to relinquish control of the yield curve was due to “improving the economy” and “earlier than expected progress towards the inflation target” ( 2 to 3%).
“Since other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in maintaining the general rate structure interest in Australia has declined. “
Dr Lowe has said over and over again: âThe [RBA] The board will not increase the cash rate until actual inflation is sustainably within the target range of 2-3%.
“This will require the labor market to be tight enough to generate significantly higher wage growth than it currently is. It will likely take some time.”
Inflation and wage growth struggling
In previous statements, the governor has consistently said that rates are unlikely to be lifted “until 2024”. He didn’t just reassure this time.
However, Dr Lowe has tried to play down speculation about the rate hike by pointing out that Australians are unlikely to see significant wage increases for some time.
“Inflationary pressures are also less than they are in many other countries, not least due to only modest wage growth in Australia.
“The board is prepared to be patient, the central forecast being that core inflation will not exceed 2.5% at the end of 2023 and for only a gradual increase in wage growth.”
The Australian dollar fell to 74.87 cents US at 4:30 p.m. AEDT (down moderately 0.5 percent).