RBA holds rates amid signs economy bouncing back

The Reserve Bank board has held official interest rates steady at an equal record low of 0.1 per cent amid signs the economy is bouncing back strongly from the pandemic recession.

Governor Philip Lowe on Tuesday confirmed the cash rate, which was cut to 0.1 per cent in November, would remain at that level for the foreseeable future.

The RBA left rates at 0.1 per cent.Credit:Louie Douvis

In a statement, Dr Lowe said the economic recovery was “well under way” and stronger than had been expected.

Ahead of the meeting, data from the Australian Bureau of Statistics suggested Wednesday’s national accounts would confirm the economy continuing to rebound from the recession.

Net exports will detract 0.1 percentage points from growth in the December quarter, much better than had been anticipated by analysts. Government spending, both on day-to-day services and capital programs, will add 0.3 percentage points to growth.

Westpac senior economist Andrew Hanlan said taking into account other partial indicators, it appeared the economy had grown by 2.5 per cent through the final three months of 2020.

“The national accounts will confirm a sizeable bounce in activity associated with the reopening of the economy as COVID-related restrictions were eased, with Victoria emerging from its second lock-down,” he said.

“Adding to the impetus, home building is now in an upswing and business investment may have advanced after a string of negatives, led by equipment spending.”

A 2.5 per cent quarterly increase would still leave annual growth at minus 1.8 per cent.

The RBA’s rates decision was expected but it follows the bank spending $10 billion since late last week as part of its efforts to control the interest rates on government debt, which have spiked over global concerns about inflationary pressures.

The lift in government debt interest rates was accompanied by an increase in the Australian dollar, which last week climbed above US80¢. The bank has been explicit in noting concerns about the impact of a strong dollar on the national economy.

Dr Lowe made clear the bank remained committed to its current plans to continue buying government debt, which includes buying $100 billion in federal and state debt beyond April.

The bank’s focus remains on the strength of the jobs market and wages.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” he said.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.”

Dr Lowe said current low interest rates were helping the economy by keeping financing costs very low and contributing to a lower Australian dollar.

“Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently,” he said.

“Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.”

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