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RBA keeps cash rate steady as lockdowns hinder recovery
Lockdowns across the country, the spread of the Delta variant of COVID-19 and the stuttering vaccination roll-out have all contributed to the Reserve Bank of Australia’s resolve to keep its cash rate at its record low of 0.10%, for its ninth month running, in line with most experts’ expectations.
With the surprise economic recovery and confidence both now faltering, the RBA’s options for lifting interest rates sooner than it had originally predicted in late 2024 are now narrowing.
The rate of vaccinations and the increased number of lockdowns will slow things now as they’ll be curbing economic activity significantly.
We might even see a negative GDP quarter for September if lockdowns persist. The economy may need extra stimulus, and that will slow the pressures for an interest rate rise.
While many economists had been predicting that rates would rise well before November 2024, or even the RBA’s revised date of April 2024, now that optimism has been dampened.
The lockdowns have changed everything in terms of confidence, rising employment, inflation and wages growth – all the preconditions for an interest rate rise.
Delta has dealt a blow to the idea of the quick recovery and our return to a life that would be back to normal. Signs were good from both the UK and the US that there would be some semblance of herd immunity, but we in Australia have still got a long way to go.
Things can change so fast in this situation. Delta takes off, and while the Reserve Bank is pushing on all the levers they have, including expectations, there’s a bit of a Faustian bargain going on.
At the same time, there are now signs that inflation may begin to take off. Recent releases from the US have shown that inflation is rising there and, historically, we tend to follow those trends, There have been disruption to supply chains and some shortages of materials, particularly in the building industry, which has led to some exorbitant rises in prices.
In addition, the massive government borrowing that’s been undertaken is likely to double our debt to over $1 trillion by next year, which is a massive increase in public debt, and will put further pressure on interest rates.
The extended lockdown in NSW will have an impact on the Australian economy as a whole, which will make the RBA’s forecast of no rate rises until 2024 even more realistic.
Before these lockdowns, when the economy was strengthening and employment and inflation picking up, everything was looking a lot more positive. But now the lockdowns have proved a real setback.
Everyone now is starting to adjust their expectations. But the property market is still performing strongly, with everything operating so well online and construction is back, so everything could rebound quite strongly. But the vaccination rate will determine so much at the end of the day.
The economy could rebound strongly after this latest scare. The pent-up energy in the housing market, and the confidence demonstrated by the return of investors.
The market will continue to move at pace, and the RBA will be using more macro-prudential changes to regulate it, looking at debt-to-earnings ratios and the loan-to-value ratio caps.
We could be in a low interest environment for several years yet.
