Reserve Bank of Australia insists economic conditions ‘still a fair way’ from an official interest rate hike

Commercial banks keep increasing fixed interest rates, with CBA the latest to do so, but the central bank insists it won’t move next year.

The Reserve Bank of Australia insists economic conditions won‘t be ripe for an official interest rate hike until 2023 despite the market already moving in anticipation of a move next year.

Delivering an address to the CPA Australia Riverina Forum in Wagga Wagga on Thursday, governor Philip Lowe also said the central bank was considering three different options for its stimulus program of bond buying, with the third option to cease it altogether in February.

The first option is to further taper the purchases from the current rate of $4bn a week and end them in May, while the second is “to taper further and then review the situation again” that month.

The board will make a decision at its next meeting in February, with all three options based on the premise that the economy does not suffer another serious setback.

“He stressed, ‘we have made no decision yet’ on whether to accelerate the tapering of purchases or to scrap the program altogether,” CommSec senior economist Ryan Felsman noted.

It comes after the US Federal Reserve announced overnight it would taper its asset purchases, buying $US60bn worth of bonds in January, down from this month’s rate of $US90bn as price inflation continues to rise and the labour market improves.

“But (US) Fed officials see as many as three interest rate hikes in 2022,” Mr Felsman said.

Reserve Bank governor Philip Lowe says one option for its stimulus program of bond buying is to cease it altogether in February. Picture: Jane Dempster/The Australian

Dr Lowe pushed back against persistent commentary from many commercial bank senior economists that the RBA’s cash rate – the interest rate on unsecured overnight loans between banks – would be hiked from the historic low of 0.1 per cent in 2022.

The central bank had been long insisting an increase would not happen before 2024 but in November conceded price inflation had picked up sooner than thought and left the door open to a 2023 move.

“The Reserve Bank board will not increase the cash rate until actual inflation is sustainably in the 2-3 per cent target range,” Dr Lowe reiterated in his latest speech.

“We are still a fair way from that point.

“In our central scenario, the condition for an increase in the cash rate will not be met next year.

“It is likely to take time for that condition to be met and the board is prepared to be patient.”

He said the RBA’s central scenario was for the unemployment rate to reach 4¼ per cent by the end of next year – down from 4.6 per cent last month – and 4 per cent by the end of 2023.

“If we could achieve this, these would be good outcomes – Australia has not experienced a sustained period of unemployment at levels this low since the early 1970s,” Dr Lowe said.

His comments come as the latest labour force figures show employers went on a hiring blitz last month, with a record-breaking 366,100 workers landing a new job or being rehired after an easing of Delta Covid-19 restrictions in Australia’s southeast.

Commonwealth Bank is the latest to increase its fixed interest rates. Picture: NCA NewsWire/Emma Brasier.

He said another key consideration – wages growth – remained relatively low in Australia, picking up recently but only returning to the low rates prevailing before the pandemic.

“Most workers are still receiving wage increases starting with a two and sometimes lower than this,” he said.

The RBA expects a gradual pick-up in wages growth to be associated with a steady but gradual increase in inflation to 2½ per cent over 2023.

That compares to price inflation of 6.8 per cent in the US – the highest rate in almost four decades.

“So, we are in quite a different position from the United States,” Dr Lowe said.

Mr Felsman said CBA economists expected wages would rise faster than the RBA’s forecasts on the back of a buoyant economy in 2022.

“CBA group economists estimate that the jobless rate will hit 4.1 per cent by the end of 2022, with annual wages growth of 2.8 per cent pushing the annual growth rate in trimmed mean consumer prices to 2.5 per cent,” he said.

“Lift-off for the cash rate is expected, therefore, in November 2022.”

Dr Lowe’s insistence the cash rate will remain on hold next year has not stopped commercial banks from hiking fixed interest rates, leaving variable rates – which they can lift at any time -– the arena for competing for customers.

Commonwealth Bank on Friday increased fixed rates by up to 0.25 per cent for owner/occupiers and up to 0.20 per cent for investors.

Canstar said it was the fourth time the bank had hiked fixed rates since the spring property selling season in September.

“We are already starting to hear from lenders that borrowers are moving away from fixed rate loans and opting for variable rate loans,” the group’s general manager of research and insights Mitch Watson said.

“While fixed rate loans may provide certainty around repayments, Australians are seeking to boost their budget by going with the cheapest option.

“The number of variable loans on Canstar below 2 per cent has increased to 63 from just 14 a year ago, while the number of fixed rates below 2 per cent has decreased, so it’s likely we’ll see a bigger shift towards variable mortgages in 2022.”

Originally published as Reserve Bank of Australia insists economic conditions ‘still a fair way’ from an official interest rate hike