RBA’s big rate decisions locked in for July

Reserve Bank of Australia Governor Philip Lowe. Picture: Nikki Short

The “big meet” takes place in five weeks.

The Reserve Bank held its monthly meeting Tuesday and did what it was always going to do: nothing.

There were though two critically important and somewhat different “nothings”.

The first was the RBA leavings its official interest rate unchanged at the all-but zero 0.1 per cent and promising, yet again, to leave it there all the way through to early 2024. At least, early 2024.

This is why – flexible not fixed – owner-occupied home loan rates are around 2 per cent and are not going to move much from there anytime soon.

The second major “nothing” was to defer its decision on which Commonwealth bond to use for its “3-year yield target” – the one it’s using now, the April 2024 bond, or the November 2024 bond – until the July meeting, in five weeks.

Uncertainty over this is why interest rates on those longer-term bank fixed rate home loans are edging up, with RateCity reporting Tuesday the last 4-year fixed rate under 2 per cent had now gone.

Now, there was no surprise in either ‘non-decision’: the RBA has been saying for months it won’t touch its official rate until 2024, and it has also previously explicitly committed to make the target bond decision at the July meeting.

Events though, and two other RBA decisions, make that July meeting even more potentially portentous, both for the pros in financial markets and for consumer borrowers and depositors.

Last month the RBA said it was “not considering” a further extension of its TFF – Term Funding Facility. It didn’t explicitly repeat that statement, but the implicit confirmation was pretty clear.

Under the TFF, the RBA is directly lending banks up to $210 billion ($134 billion has been borrowed, and there’s $75 billion left) at that 0.1 per cent for three years, which they can promptly on-lend out at 2 per cent and percentage points higher.

I’d expect the banks to lap up the rest, locking in the cheap money out to mid-2024.

There’s no need for the RBA to give them more, and it won’t.

The target bond decision critically intersects with another big decision the RBA will make in July: whether and how to continue its “government bond purchase program”.

So far it’s committed to buy up to $200 billion in government bonds (mostly Commonwealth and some state) through to September. This indirectly funds the (mostly) huge federal budget deficit and keeps downward pressure on interest rates further out from 3-years on the bond yield curve.

This might sound highly technical and of interest mostly to pros, but it plays directly back into what you pay on home loans – mostly but not only fixed-rate ones – the value of the dollar and to some extent also share prices.

The most obvious decision in July would be to stick with the April 2024 target bond.

That’s effectively underwritten the promise to leave its official rate at 0.1 per cent until early 2024. To switch to the November bond would imply a commitment to keep the official rate at 0.1 per cent all the way through 2024.

Unless the world turned seriously dark over the next month – which, even looking out from Victoria, I doubt is likely – that would make no sense.

If anything, in my judgment, the RBA will really have to start contemplating lifting its rate some time before 2024; and if it did that, it would self-evidently have to abandon even the April 2024 bond for targeting a 0.1 per cent yield.

Right now it clearly does not think that’s in prospect.

As I’ve noted its cousin across the Tasman thinks somewhat differently; that it will be raising its official rate, and raising it from 0.25 per cent not 0.1 per cent, much sooner; indeed even potentially next year.