RBA steadies into two huge unknowns

The RBA did exactly what it needed to do and kept interest rates on hold but there are big challenges on the horizon.

THE Reserve Bank has kicked off the new year — and hopefully a new upbeat post-vaccine year at that — by doing what it was expected to do and precisely what it needed to do.

In simple overall terms that was to not rock the boat.

In specific terms, it has left its official rate at the all but zero 0.1 per cent and promised to not lift it for at least three years.

RBA governor Philip Lowe’s precise words were: “does not expect to … until 2024 at the earliest.”

Note the word “lift”; a further cut, into the negative, always remains possible.

Although it is important for me to stress that Lowe has made it crystal, and repeatedly, clear he’s utterly opposed to doing that.

Thus, if he did, it would only be because the economic and/or financial environments had turned seriously — and I mean seriously, dark.

Or, to some extent, possibly because of the precise opposite: if the Aussie dollar headed back towards US90c and indeed potentially even parity with the US dollar, like it did in the early 2010s after the GFC, driven by a booming China and surging commodity prices.

He could be forced to cut into the negative to try to halt such a surging Aussie, as that would be making it that much harder to get inflation (and wages) off the floor and growth (and jobs) up.

There is uncertainty about how quickly the vaccine will be rolled out and how effective it is going to be.

Interestingly, the RBA’s latest index of commodity prices showed them rising to their highest level in nearly a decade, and it’s not just iron ore.

It’s also wheat, it’s copper, it’s LNG — thanks to President Biden — and it’s silver, thanks to the gamer-geek day traders unleashed more widely into the market by the assault launched on their beloved GameStop.

The 0.1 per cent is not only critical to anchoring home-loan interest rates at their (slightly) sub-2 per cent level and also “anchoring” deposit rates at a tad above zero if you are lucky.

It’s also the pivot for everything the RBA is doing.

The RBA is lending to the banks at that 0.1 per cent.

The banks have so far said “thank you very much” for $86bn and could take another $99bn.

The RBA is buying bonds — at the 0.1 per cent interest yield out to three years, higher for longer terms — and funding most of the huge budget deficit.

It’s bought $52bn so far; it plans to buy another $100bn.

Interestingly, it hasn’t had to buy any short bonds to keep the yield at 0.1 per cent since early December.

RBA governor Philip Lowe. Picture: NCA NewsWire/Gary Ramage

The market’s demand for bonds has been doing the job for it.

But that also points to that potential Aussie dollar problem: foreign investors are buying the Aussie and the safest place to then put that money is into a Commonwealth bond.

Apart from this general overlay of giving everyone — both the pros and ordinary Australians — a foundation of stability, there are two big, and I mean huge, uncertainties facing everyone and which would have made any shift by the RBA right now ludicrous.

The first is the vaccine: how quickly is it going to come and how effective is it going to be?

The second is the countdown to the end of JobKeeper at the end of March.

JobKeeper has been the single biggest thing holding up the economy; indeed, it’s given it almost an upbeat tick into 2021.

In a little under two months, something like 1.5 million jobs — one in six in the private sector — and the businesses behind them will be on their own.

There’s a lot of rapidly flowing water that can and will flow under the proverbial bridge over the next two months: we got what we needed from the RBA.