Reserve Bank ‘prepared to be patient’ as interest rates kept at record lows into 2022

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The Reserve Bank has left its official interest rate target on hold at a record low 0.1 per cent and will continue its $4-billion-a-week bond-buying stimulus program until at least mid-February.

That means the bank’s policy remains unchanged since its last meeting in November and is almost certain to remain unchanged until its next scheduled meeting in February, unless there is a financial crash over summer.

And it currently does not expect the Omicron outbreak to cause such a disruption.

The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery,” RBA governor Philip Lowe said in his post-meeting statement.

“The economy is expected to return to its pre-Delta path in the first half of 2022.”

However, it is likely there will be a significant policy move in February, with the Reserve Bank poised to end, or at least reduce further, its purchases of government bonds.

“In reaching its decision in February, the board will be guided by the same three considerations that it has used from the outset of the program: the actions of other central banks; how the Australian bond market is functioning; and, most importantly, the actual and expected progress towards the goals of full employment and inflation consistent with the target,” Dr Lowe explained.

By mid-February, the RBA expects to own around $350 billion in Australian federal, state and territory government debt.

“Given the strong rebound in activity and the pick-up in inflation, we expect the Bank to taper its bond purchases to $3 billion in February and to end them completely in August,” noted Marcel Thieliant from Capital Economics.

RBA has patience

However, while the bond-buying program is likely to be wound back, Dr Lowe emphasised that the bank’s board was willing to remain patient for the economy and wages growth to improve substantially before considering a rise in interest rates.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” he re-stated.

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

“This is likely to take some time and the board is prepared to be patient.”

While analysts take the RBA at face value, Mr Thieliant said markets did not and were anticipating the first rate hike as soon as July next year, with 1.75 percentage points of rate rises by the end of 2023.

“We still believe that those expectations are too aggressive, given that wage growth won’t reach the 3 per cent mark that the RBA wants to see before the end of next year,” he wrote.

“As such, we only expect the first rate hike in early 2023.

“And given the high indebtedness of Australian households, we think that the bank will have to tread more cautiously than the financial markets anticipate. We’re only forecasting 75 basis points of rate hikes by end-2023.”

Risky housing debt on the rise

Backing up Mr Thieliant’s thesis on debt are the latest figures from bank regulator APRA.

Data for the three months to September 30 showed that nearly a quarter (23.8 per cent) of new home loans involved a debt-to-income ratio of six or above, a level considered risky by APRA.

That was a rise from 21.9 per cent the previous quarter and just 16.3 per cent a year earlier, as buyers took advantage of lower interest rates to chase soaring property prices higher.

Although even the latest data predates a slight tightening on lending standards by APRA.

“Australians are increasingly taking on eye-watering levels of debt compared to what they earn to get into an overheated property market,” observed Sally Tindall, research director at RateCity.

“Record-low rates have enabled Australians to borrow more from the bank than ever before.

“However, when rates start rising, people who’ve taken on risky levels of debt could find balancing the monthly budget infinitely more challenging.”

While the amount of debt relative to incomes has ballooned, the APRA data also showed that the proportion of low-deposit loans has been falling, from 10.4 per cent last September quarter to 7.5 per cent in the most recent one.

That corresponds with a decline in the proportion of first home buyers, who tend to have smaller deposits than those who have already built up housing equity.

For its part, the Reserve Bank does not seem overly perturbed about the run-up in house prices, noting that the real estate market appears to be cooling down somewhat.

“Housing prices have risen strongly over the past year, although the rate of increase has eased over recent months,” Dr Lowe said.

“Housing credit increased by 6.7 per cent over the past year, but, more recently, the value of housing loan commitments has declined from high levels.”

By business reporter Michael Janda (Original ABC Article)