RBA holds interest rates near zero as COVID lockdowns threaten recovery

The Reserve Bank of Australia has kept interest rates at a record low of 0.1% and will continue to unwind other key policy measures as planned, even as COVID lockdowns threaten to derail the economic recovery.  

At its monthly board meeting on Tuesday, the RBA acknowledged the recent coronavirus outbreaks were interrupting the Australian economy’s recovery, with gross domestic product expected to contract in the September quarter.

However, RBA governor Philip Lowe said based on previous lockdowns, economic activity should bounce back once restrictions ease.

“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly,” Mr Lowe said in a statement.

In a vote of confidence for the recovery, the board will continue with plans to unwind some of the emergency policy settings it put in place last year, which have helped to keep borrowing costs low and support the economy.

Last month, the RBA announced it would start to scale back the next stage of its bond buying program from September.

“The board will maintain its flexible approach to the rate of bond purchases,” Mr Lowe said on Tuesday.

“The program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target.”

While acknowledging the impact low interest rates are having on the property market, Mr Lowe said the board will not lift the cash rate until actual inflation is sustainably within its 2-3% target range.

“The central scenario for the economy is that this condition will not be met before 2024,” Mr Lowe said.

Despite predictions by some economists that the central bank may be forced to begin raising interest rates earlier than expected, realestate.com.au economist Paul Ryan said the Sydney lockdown has likely reinforced the RBA’s position.

“There was a lot of speculation a month or so ago that the improving economic climate would mean that the RBA would bring forward policy changes sooner than their stated expectation of 2024. What the lockdown means is that they’re increasingly unlikely to do that,” Mr Ryan said.

“It’s not my expectation that we will have inflation strong enough to warrant a RBA policy change until more like later in 2024 or 2025,” he added.

Low interest rates continue to bolster lending activity

The prospect of low borrowing costs for years to come has spurred lending activity this year, with record-breaking volumes of home loan commitments recorded in seven out of the past eight months.

Australian Bureau of Statistics data on Tuesday revealed new home lending hit $32.1 billion in June, a modest 1.6% fall from the previous month’s record high.

ANZ economists Adelaide Timbrell and Felicity Emmett said the fall barely put a dent in the housing finance surge.

“Owner-occupier lending is at its second-strongest level ever and is still over 50% above pre-pandemic levels,” Ms Timbrell and Ms Emmett said in a research note.

Other ABS data released on Tuesday showed building approvals fell for the third month in a row after the end of the HomeBuilder grant, declining by 6.7% in June.

“We expect NSW approvals and lending to moderate as a result of lockdown, but the national numbers will be supported by strength in other states, given mortgage rates remain very low,” Ms Timbrell and Ms Emmett said.

The strong momentum has continued to lure investors back into the market, with more than $9 billion worth of investor loans issued for the second month in a row.

Investor lending is now double that of a year ago, and the highest level since April 2015.

In contrast, affordability constraints are pricing some first-home buyers out of the market, with realestate.com.au data revealing national property prices have increased 19.7% in the 12 months to July 2021.

The sharp increase has raised concerns that households may be overstretching themselves to get into the market.

But while financial regulators including the RBA and Australian Prudential Regulation Authority don’t target house prices, they have a range of tools at their disposal should lending standards deteriorate.

“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” Mr Lowe said.

‘Not the right time’ to restrict lending

The resurgence in investor lending, which is typically viewed as higher risk, has raised expectations that financial regulators may reintroduce macroprudential policies to cool the market.

But realestate.com.au’s director of economic research Cameron Kusher said now is not the right time.

“While calls for macroprudential intervention will continue to grow as prices continue to rise, the RBA and APRA should resist these calls for the time being, unless of course there is meaningful deterioration in lending standards,” Mr Kusher said.

He said international border closures have redirected money that would have been spent on overseas travel into property, although this won’t continue forever.

“With COVID-19 vaccines now being rolled out and hopefully lockdowns ending as vaccination rates increase with a view to reopening the international border next year, this return to a more normal and functioning economy should lead to less demand and money pouring into housing and more heading into things like domestic and overseas travel,” he said.

“There is already an indication that some of the heat has come out of the property market, with the rate of price growth slowing over recent months and demand for property not as strong as it was earlier this year.”

In June, the banking regulator APRA sought assurances from Australia’s major lenders that they are managing risks within their housing loan portfolios.