RBA cements its no rate rise promise

The RBA isn’t going to lift interest rates any time soon. It’s part of what it sees as its contribution to dealing with the virus and post-virus challenges.

The Reserve Bank’s intentions on what it plans to do with interest rates are hiding in plain sight.

They are, in a word: nothing.

Now add five more words: for at least three years. The RBA left its official cash rate unchanged at 0.1 per cent yesterday – effectively zero and the reason thousands of Australians are rushing to borrow what is all-but ‘free money’ to pump into property.

There was no surprise in that RBA decision. No-one, and especially not those who are punting on an ‘early’ official rate rise, were punting on it happening that quickly, or indeed anytime at all this year or for most of 2022 either.

There are those, though, that think – believe might be a more accurate word – 2023 might develop into a very ‘interesting’ year, so far as interest rates are concerned. And that it will get ever more ‘interesting’ as you go through 2023.

Those who are not mathematically challenged would be able to work out that any rate rise in 2023 would be before ‘at least three years’ from March 2021.

So who’re you gunna believe? The – outlier - market punters or RBA governor Philip Lowe, the person who actually controls the rate lever?

If the phrase hadn’t already been used – and abused in a previous context, I would advise to “read his, as opposed to my, lips”. There “will be no official rate rise for at least three years”.

Lowe said it again yesterday, although pedantically you might argue that he didn’t quite say it. His exact words were “the Board does not expect these conditions (for a rate rise) to be met until 2024 at the earliest”.

But to see that as opening the door to an earlier rate rise is clutching at – non-existent – straws. It is also failing to see or understand the very substantive reasoning that drives the RBA’s commitment.

Reserve Bank Governor Philip Lowe. Picture: Nikki Short

The RBA hasn’t just plucked the three-year promise out of the firmament. The promise is rooted in the RBA’s policy obligation to get inflation – up – into the 2-3 per cent range and what it more broadly sees as its contribution to dealing with the virus and post-virus challenges.

Inflation is only going to lift to 2-3 per cent if wages – across the community – are rising consistently and sustainably by at least 3 per cent a year. And THAT is only going to happen if the jobless numbers drop dramatically, sustainably and across the board.

The first stop, so to speak, on the jobless and wages fronts comes at the end of the month when JobKeeper ends and around 1m workers and the businesses that employ them are then ‘on their own’.

Two other points play into and derive from the RBA’s rate promise.

The practical implementation of the RBA’s promise is the way it buys bonds to ensure the three-year yield stays at that 0.1 per cent.

The specific bond it’s been buying is the April 2024 bond. Those not calendar-challenged would understand that in two months time that becomes a LESS-than three year bond.

Lowe has already mused on whether the RBA sticks to that or shifts the 0.1 per cent target and promise out to later in 2024.

Secondly, we’ve just ‘come through’ a flurry of activity that drove ten-year bond yields around the world sharply higher.

It quickly subsided, thanks to some ‘punchbowl-filling’ by Fed head Jerome Powell, and hence the surge on Wall St overnight Monday.

It’ll come back, probably quickly. Read my lips: we are headed for arguably spectacular volatility with longer bond yields and global share markets.

But importantly, the RBA promise is all and only about three-year yields (and its official rate).

Punters can take longer yields where they want.