Budget eagerly awaited as cash rate held for another month

by Mike Wood05 May 2021

The official Reserve Bank of Australia (RBA) cash rate has been held at 0.1% for another month, sparking more debate about just how long it can remain so low.

Yesterday’s decision marked the seventh month in which the rate has been held at the lowest possible level without entering negative territory.

Many had expected that the rate would hold. Throughout the time that it has been this low, however, there have been calls for the RBA to bring forward its current plan to keep the cash rate at 0.1% until 2024.

“The Board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target,” said Reserve Bank Governor Philip Lowe. “It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.

The property market has been resurgent, buoyed by the low interest rates.

“Housing markets have strengthened further, with prices rising in all major markets,” said Lowe. “Housing credit growth has picked up, with strong demand from owner-occupiers, especially first-home buyers. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

With interest rates this low, the next big decision will come on May 11, when Federal Treasurer Josh Frydenburg is set to announce a budget. Unemployment has fallen at a faster rate than previously expected, though the effects of the end of the JobKeeper scheme are yet to reverberate around the economy.

“The economy has bounced back from the pandemic in pretty good shape,” said John Kolenda, Managing Director at major aggregator Finsure. “The RBA will now be awaiting the impact of measures in next week’s federal budget which could further boost the economy and lead to a review of its rate rise forecasts.”