No Christmas cash rate surprise, but stage set for big 2022

by Mike Wood07 Dec 2021

The cash rate has been held at 0.1% again, marking a full year with the lowest possible central bank base rate.

The Reserve Bank of Australia (RBA) caused few surprises, as any upwards movement would have sent shockwaves through the economy just before Christmas, but now sets the stage for a potentially turbulent 2022.

The next cash rate decision will be on the first Tuesday of February next year, and all eyes will be on a new date that the RBA may well set for a rate rise.

Before the lockdowns in 2021, banks had already begun to price in a rate rise for late 2022, while the RBA insisted that it would not budge until 2024 at the earliest.

The lockdown-induced economic slowdown saw the Big Four banks and the RBA briefly realign in their expectations, before departing from each other again.

Read more: Top economist breaks down cash rate future

In the last cash rate announcement, the RBA abandoned their 2024 target, while a raft of fixed rate changes in the last month have seen banks attempt to price in when they think a cash rate rise will happen.

The current market conditions, which show a wide gap in pricing between two-year and three-year fixed rates, suggests that banks think a rate rise will come in 2023, though their pricing is also affected by other factors such as a the price of bonds.

“This is the last interest rate decision from the Board of the Reserve Bank of Australia (RBA) until Tuesday the first of February 2022,” said Creditorwatch chief economist Harley Dale.

“Maybe they have a Christmas tree in the corner of the room because the RBA hasn’t shaken many trees in its final 2021 stanza.”
“In a predictable fashion, the RBA Board came to the decision to keep the Official Cash Rate (OCR) at the record low of 0.1 per cent at the end of 2021. The OCR has stood there since November 2020 when the Bank cut the rate by fifteen basis points.”

No surprises with RBA cash rate decision

“The Australian economy is emerging from an extensive lockdown period, although restrictions continue to vary and move around. There is still uncertainty out there for households and businesses.”
 

“November may represent the first month when Australia was over substantial lockdowns, but yet there is little data on that. The CreditorWatch Business Risk Index for November 2021 conveyed the vast divergences in business conditions across industries and regions.”

“In other words, the economic recovery won’t happen anywhere near close to a straight line. A recovery never does, but now more so than ever.”

“The RBA may well be contemplating the prospect of interest rates rising sooner than officially conveyed for such a long time now, but they seem happy to play Santa for now.”

“Conjecture regarding when the RBA will move is only going to escalate in 2022. That in and of itself is not helpful for household and, especially business confidence. Yet in such a dynamic economic environment, early February 2022 is a long way off.”

“The first meeting of the RBA Board next year will convene with considerably more information regarding the economic environment post June – October of this year. That statement at the very beginning of February may set tongues wagging.”