Relief greets interest rate decision and RBA’s softer position

Larry SchlesingerDecember 8, 2020

The Reserve Bank's announcement that it will leave interest rates unchanged in June at 4.75% and toned-down rhetoric on future rates has been greeted with relief.

A 25 basis points increase, as some economists were predicting, would have meant an increase of $50 per month for a homeowner with a typical $300,000 mortgage and basic variable rate of 7.17% (the average of the four major banks' basic variable rate mortgage).

The rhetoric in the statement following the decision by RBA governor Glenn Stevens suggests further rate rises could be further away than have been forecast.

Stevens pointed to a number of reasons why the bank’s “mildly restrictive stance of monetary policy remained appropriate”.

Most notably, he says that although CPI inflation has risen over the past year (currently at 3.3%), it reflects the effects of extreme weather and rises in utilities prices.

“The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months,” Stevens says.

Bill Evans, chief economist at Westpac, says the RBA's rhetoric indicates that its commitment to an early rate hike has been significantly diluted.

“Indeed, even the May statement was more hawkish than this one today. Most importantly, a paragraph in the May statement that included the observation 'over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected' was eliminated from this statement,” Evans says.

Aaron Gadiel, CEO of industry lobbying body the Urban Taskforce, draws a similar conclusion. 

According to Gadiel, fears that the RBA has an “itchy trigger finger on interest rates have already caused some building plans to be shelved or delayed".

“We hope the bank will be less keen to raise the spectre of new interest rate rises in future monetary policy statements.”

Real Estate Institute of Australia (REIA) president David Airey says the decision is the right one, given the state of housing affordability in Australia.

Airey says the RBA has “accurately assessed the property market”.

HIA senior economist Andrew Harvey says the decision “reflects a rare bit of good news amidst mounting pressure on home affordability and fast-declining activity in the residential building sector”.

“It just gives a touch of relief to those Australians paying off mortgages and also to those trying to enter the housing market, amidst the less predictable environment households face in the post-GFC era,” he says.

Laing+Simmons general manager Leanne Pilkington also welcomes what she called “the only option available” to the RBA but remains perplexed at “persistent talk of a rise in the next few months”.

“The recent March quarter contraction can be dismissed as being a result of the natural disasters, but the figures are more than just a blip on the radar. 

“Remembering that another consecutive quarter of negative growth places us in recession and the need to support struggling families becomes even more apparent,” Pilkington says.

“House prices are declining in value in some markets, many homeowners are finding themselves in a position of negative equity, and clearance rates are down.”

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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