The RBA Maintains Low Interest Rates Amid Low Wage Growth
Published 6:51 am 20 Jul 2021
The RBA has reaffirmed that it will keep its record low-interest rates until 2024 – defying the predictions of the big banks.
Late last year, the Reserve Bank of Australia (RBA) cut its cash rate to a historic low of 0.1 percent as a means of addressing the economic downturn brought about by the COVID-19 pandemic. At the time, the RBA stated that the rates would remain at 0.1 percent until 2024.
Several of the big banks expressed their doubt about the RBA’s projection, with big banks like ANZ and Westpac predicting that rates will rise in 2023, and the Commonwealth Bank of Australia (CBA) predicting a rate rise as early as 2022.
Now, however, the RBA has responded to the doubts surrounding the rate rise date, with the RBA Governor Philip Lowe once more reiterating that 2024 remained the expected year for a cash rate increase.
“The central scenario remains that the condition for a lift in the cash rate will not be met until 2024.”
In a recent Q&A session with analysts and journalists, Lowe went on to say:
“The inflation outcomes in Australia are further away from the target … it’s partly linked to the issue of wages.”
“Wage growth in Australia had slowed by more than it had in most other countries, even before the pandemic, and we had a particularly large response in wages during the pandemic as well.”
Wage Growth for public & private sectors
The RBA is intent on hitting its inflation target of 2-3 percent before rising rates, and according to Philip Lowe, that inflation target won’t be achieved prior to 2024.
“We’re certainly not hinting at rate increases in 2023.”
“[The RBA] will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The bank’s central scenario for the economy is that this condition will not be met before 2024.”
On the point of concerns about inflation, Lowe mentioned that the RBA is focused on wage growth as a means of helping to drive the inflation rate into the target range.
However, despite the fact that Australia’s supply of workers has been reduced amid border closures to overseas workers, wage growth may not necessarily improve, argues Lowe.
“If the borders remain closed for a very extended period of time I think we’ll see more and more of these pressures in the labour market that we’re seeing,” he said.
“Some people might think that’s positive, but it comes at the cost of businesses not being able to get the people they need to do the investment and expansion.”
Consumer confidence hits 30-year-low
In addition to a lack of overseas workers and renewed lockdowns, the Australian economy may continue to struggle as consumer confidence hits a 30-year lull, according to the latest ANZ-Roy Morgan Australian Consumer Confidence Media Release.
Consumer confidence dropped by 3.9% over the week, bringing the four-week average to 110.9, below the monthly average of 112.6 witnessed since 1990.
Consumer confidence is a useful predictor of future economic activity as it outlines how Australians perceive the health of the economy as well as how they intend to respond to their perceptions.
For example, ANZ-Roy Morgan’s polling data shows that ‘Time to buy a major household item’ fell by 4.4%, and the outlook for ‘Future economic conditions’ dropped 4.1%.
As consumer confidence dips, households will begin to reduce their spending as a safeguard for economic uncertainty. Moreover, the decreases in consumer confidence weren’t limited to areas that are undergoing a spike in COVID-19 cases, as the report states:
“The drop in sentiment wasn’t confined to those areas directly impacted by restrictions. For instance, while it fell by 8.9% in Sydney it also declined by 1.6% in the rest of NSW. Confidence fell in most other cities as well: Brisbane (-7.7%), Melbourne (-2.7%) and Adelaide (-6.5%).”
A reduction in consumer confidence typically accompanies a reduction in economic activity, and as such, we may expect a further dampening of wage growth and the employment rate in the near future as companies experience a reduction in their sales activity.
Will the property market continue to boom?
The increased savings of Australians amid the pandemic in conjunction with historically low interest rates and other favourable conditions have helped to propel the country’s property market to record highs, pushing the combined value of the Australian housing market to $8.4 trillion as of June 2021 according to CoreLogic. In the last 12 months alone, Australia’s property market has grown 13.5% on average.
Momentarily, it seemed as though these favourable conditions surrounding the property market might end sooner than expected when big banks such as CBA (the primary lender of home loans) predicted a rate rise as early as next year.
However, the RBA’s latest affirmation that the cash rate wouldn’t rise until 2024, combined with the dip in consumer confidence hints at a continuation of the upward trajectory of the property market.
With confirmation that the cash rate will remain in place until 2024 and more Australians deciding to save their cash amid the economic uncertainty of the COVID-19 pandemic, the conditions surrounding the property market remain ripe.
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