Australia’s Interest Rates Kept On Hold
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Australia’s Interest Rates Kept On Hold

Rates stay at historic low 0.1 per cent.

By Terry Christodoulou
Tue, Mar 2, 2021 4:22amGrey Clock < 1 min

Today, the RBA has passed down its decision to keep Australia’s interest rates on hold at the historic low of 0.1 per cent.

The decision comes despite growth in the Australian property market and the global economic outlook appearing more favourable.

The statement highlighted the importance of low rates to support the rebuilding of the economy and support the supply of credit to both households and business balance sheets.

“Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently,” said Governor of Monetary Policy Decision Philip Lowe.

“Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low-interest rates.”‘

The decision has also taken into account the global economic outlook in the wake of COVID-19 and the successful rollout of vaccines.

“The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago,” added Dr Lowe.

Closer to home, economic recovery is well underway with unemployment declining to 6.4 per cent alongside strong retail spending and most households and businesses that had deferred loan repayments having now recommenced payments.

The recovery is expected to continue with the GDP expected to return to its end-2019 level by the middle of this year

The Reserve Bank remains committed to the 3-year yield target and has doubled the bond-buying program last month by extending it for a further 20 weeks.

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Most economists and the major banks are predicting a rise of 25 basis points will be announced, although the Commonwealth Bank suggests that the RBA may take the unusual step of a 40 basis point rise to bring the interest rate up to a more conventional 3.5 percent. This would allow the RBA to step back from further rate rises for the next few months as it assesses the impact of tightening monetary policy on the economy.

The decision by the RBA board to make consecutive rate rises since April last year is an attempt to wrestle inflation down to a more manageable 3 or 4 percent. The Australian Bureau of Statistics reports that the inflation rate rose to 7.8 percent over the December quarter, the highest it has been since 1990, reflected in higher prices for food, fuel and construction.

Higher interest rates have coincided with falling home values, which Ray White chief economist Nerida Conisbee says are down 6.1 percent in capital cities since peaking in March 2022. The pain has been greatest in Sydney, where prices have dropped 10.8 percent since February last year. Melbourne and Canberra recorded similar, albeit smaller falls, while capitals like Adelaide, which saw property prices fall 1.8 percent, are less affected.

Although prices may continue to decline, Ms Conisbee (below) said there are signs the pace is slowing and that inflation has peaked.

“December inflation came in at 7.8 per cent with construction, travel and electricity costs being the biggest drivers. It is likely that we are now at peak,” Ms Conisbee said. 

“Many of the drivers of high prices are starting to be resolved. Shipping costs are now down almost 90 per cent from their October 2021 peak (as measured by the Baltic Dry Index), while crude oil prices have almost halved from March 2022. China is back open and international migration has started up again. 

“Even construction costs look like they are close to plateau. Importantly, US inflation has pulled back from its peak of 9.1 per cent in June to 6.5 per cent in December, with many of the drivers of inflation in this country similar to Australia.”

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