The July 2021 board meeting of the Reserve Bank (RBA) was held amidst a multi-state COVID-19 outbreak and with Australia’s largest city and key economic centre, Sydney, in a multi-week lockdown. A stark contrast to the positive outlook and economic climate of a month earlier when the various state and territory treasurers were bringing down their optimistic budgets for economic recovery.
Despite the lockdowns etc, the climate was also defined by the continuation of soaring house prices, unemployment at 5.1% yet many businesses crying out for staff. Somewhat confusing and possibly contra messaging from the Australian economy. In recent times, some economists and financial analysts had been predicting and in some instances suggesting, that the RBA lift rates earlier than their target timeframe. With all this happening, the RBA’s monthly interest rate decision was once again keenly awaited.
The RBA July decision was to keep interest rates on hold but has commenced to wind back its level of emergency support. We provide as simple an explanation as possible to assist you in planning ahead.
RBA Board Decision
The key outcomes of the RBA Board’s July decisions are:-
- To hold the cash rate at the current rate of 0.1%
- To continue the purchase of government bonds beyond the early September target and to mid-November at least.
- To reduce the bond purchases from $5 billion to $4 billion per week.
The change to the bond-buying program which is the quantitative easing aspect is seen as easing support. In the statement accompanying the monthly decision, the RBA Governor, Philip Lowe, stated that these measures would support the economy as it transitions from recovery to the expansion phase. He said the RBA was committed to its targets of full employment and its target inflation rate.
It was noted that the outlook for investment had improved with the balance sheets of both businesses and households in good shape. The recent COVID-19 outbreaks were noted as an uncertainty but it was also noted that in previous outbreaks a quick bounce-back was experienced once restrictions were lifted.
The statement repeated similar comments made in previous months that it was expected that both inflation and wages growth is expected to pick up but with modest and gradual growth. Inflation is not expected to reach 2% until mid-2023. Previously the RBA has noted its target for a rise in interest rates is inflation in the 2-3% range.
Key for our customers, Dr Lowe stated that leaving the cash rate at 0.1% would keep interest rates at low rates and support low funding costs. The target of mid-2024 was repeated in regard to consideration of increasing rates. But a noted omission was the previous inclusion of ‘at least’ 2024. An indication to some analysts of a slight change of thinking.
Analysis and Commentary
The significance of the RBA’s bond-buying program is not an aspect that is widely understood. Understandably, as it is an area that most people will not have been exposed to. But the RBA stated that the step down in the bond-buying to $4 billion did not represent a withdrawal of support. The process is actually pumping money into the economy and is a stimulus policy.
Dr Lowe noted that the economy was in a better than forecast position but noted the bank’s concern over the housing price situation.
In the press conference held after the board meeting, which is not always held, Dr Lowe said the bank wanted to see results before raising the cash rate. Saying that wages growth needed to exceed 3% and currently, it is much less than that level. He stressed that any increase in the interest rate would be linked to inflation, not wages growth, going on to comment that a sustainable inflation rate and sustained wages growth are related.
Equipment Finance Interest Rate Outlook
With the official cash rate on hold and at the historic low levels, interest rates on equipment finance also remain at our current cheap levels. Our rates are fixed for the full term of equipment finance deals which can be as long as 7 years. Well beyond the expected 2024 rate rise target as expressed by the RBA.
But some analysts and markets are not necessarily agreeing with the RBA’s position. Some lenders were already raising their rates on home mortgages. Our customers should note however that the housing interest rate market is different from the equipment lending market.
For our customers with existing equipment finance contracts which we have arranged at fixed interest rates, those contracts will remain constant and unchanged regardless of any moves by any lenders in rates. To view and compare, head over to our equipment finance interest rate table.
For those considering an investment in new equipment to take on new work or expand their business as the economy enters the expansion phase, our cheap interest rate finance is available for the purchase of a wide range of equipment. The next scheduled meeting of the RBA Board re interest rates will be the first Tuesday of August.
Call 13000 003 for quotes on cheap equipment finance.
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.