RBA holds interest rates at record low over Christmas

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RBA holds interest rates at record low over Christmas

By Shane Wright

The Reserve Bank board has used its final meeting of the year to hold official interest rates at a record-low 0.1 per cent, where it expects them to remain for at least three years.

Following its meeting, governor Philip Lowe confirmed the cash rate, sliced to 0.1 per cent last month, would remain unchanged. The bank board next meets in early February.

The RBA started the year with the official cash rate at 0.75 per cent.

The RBA started the year with the official cash rate at 0.75 per cent.Credit: Louie Douvis

Markets were expecting the bank to hold the cash rate steady. The same markets have the cash rate at 0.1 per cent well into 2022.

Dr Lowe said the economic recovery was "under way", noting that recent indicators had been better than expected.

"This is good news, but the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support," he said.

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"In the RBA's central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the central scenario, GDP is expected to grow by around 5 per cent next year and 4 per cent over 2022."

September-quarter national accounts due out on Wednesday should show the economy recovering from the minus 7 per cent hit it took during the June quarter.

Dr Lowe said the RBA's focus would remain on the jobs market.

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He said while jobs growth had been strong in October, a further increase in the unemployment rate was likely as more people rejoined the workforce and businesses restructured.

"The board views addressing the high rate of unemployment as an important national priority," he said.

'The recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support.'

RBA governor Philip Lowe

While the recovery is under way, the bank is not expecting to change interest rate settings until 2024.

Dr Lowe said for inflation to get back to the RBA's 2 to 3 per cent target band would require wages growth to be "materially higher".

"This will require significant gains in employment and a return to a tight labour market. Given the outlook, the board is not expecting to increase the cash rate for at least three years," he said.

The RBA started the year with the official cash rate at 0.75 per cent. But through March and then November, it cut the rate to its current level.

It also engaged for the first time in quantitative easing, trying to support the economy by the direct purchase of government bonds. It has bought more than $60 billion in state government debt and has just started the purchase of up to $100 billion in more government bonds.

It has also extended a line of credit worth up to $200 billion to the nation's commercial banks in a bid to on-lend that cash to small and medium-sized businesses.

The RBA revealed it had bought $19 billion of government bonds over the past month, and commercial banks had drawn $84 billion from the bank's cheap line of credit.

KPMG chief economist Brendan Rynne said the bank's decision to hold interest rates steady was not unexpected.

"This was unsurprising, but is the right approach. While GDP results for the September quarter are expected to show a return to positive growth, the economy is still limping and the RBA's accommodative stance is not only welcome but necessary," he said.

"The combined effects of the current expansionary settings of domestic fiscal policy and monetary policy, plus the 'natural' underlying strength of the industrial structure of Australia, means that while we are not out of the woods yet, it seems the economy is now on the upswing, trade tensions with China notwithstanding."

There are signs low interest rates are feeding into the nation's property market.

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CoreLogic reported on Tuesday property prices in every capital city increased in November, climbing by 0.8 per cent nationally.

Major coronavirus restrictions in Melbourne started to be lifted from early November and property prices in the region increased by 0.7 per cent over the same period, though they were down 0.4 per cent over the quarter. Sydney property prices jumped 0.4 per cent, with quarterly growth of 0.3 per cent.

While overall prices remain below where they were in March, on the current trajectory there could be a full recovery by February for most cities.

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