February 2021: Rate Decision & Analysis. Strong start to the Year.
The Reserve Bank of Australia ("RBA") left the official cash rate at 0.10% at its February meeting and first for 2021.
This was obviously not a surprise to markets and is reflected in flat market interest rates; with all short term rates at their "temporary" settings. However, some upward momentum may be building. (See Money Markets below).
Turning of the Tide?
From an economic perspective there is a real change in sentiment.
Inflation data in the December quarter surprised markets and rose 0.9%, and whilst CPI was still only up 0.9% over the full year, the last quarter is more than anticipated. Price rises for childcare, local tourism, health insurance and tobacco were key drivers.
Unemployment levels, despite a feeling in some minds that there are a few "artificial" paid jobs at present, is also down materially.
In other sentiment measures, consumer confidence continues its relative strength. The ANZ-Roy Morgan Consumer Confidence Index is now a significant 12.7pts above the 2020 weekly average of 96.0.
Direction for Interest Rates?
There is suddenly a lot of talk about interest rates (and the ongoing intervention of the RBA). Will it shut down its quantitative easing program soon? More and more positive economic news will ultimately make extreme policy settings redundant. “We are not running a blank cheque budget,” The Prime Minister said this week.
To balance this out, the RBA has stated that current rate settings shouldn't change until inflation moves towards the old target range (2-3% if anyone remembers). In addition, the US monetary policy talk seems committed to keeping rates low for at least the next three years. With the worldwide exchange rate paranoia too, there will be a reluctance to talk of, or action, higher interest rates here at present.
This said, whilst interest rates are going nowhere for now, the first shot has been fired across the bow.
Overseas Insights
It was fascinating to read recently that a Danish mortgage lender will offer a 20 year mortgage at 0%.
This is not a total surprise, Danish lenders first issued 20-year bonds with 0% returns a few years ago, and they have a history of negative central bank rates.
Like the rest of the developed world, Danish homeowners have experienced sustained falls in interest rates for some time.
Money Markets
The RBA strategy of buying bonds to effectively help keep government debt costs low remains the key story.
The activity is now focused on longer term money, with the 10 year rate pushing out materially over the break. This is in part a reflection of a normalisation of inflation expectations into the future.
| Month | Cash Rate | 90 Bill Rate | 10 Year Bond |
| September 2020 | 0.25% | 0.12% | 0.84% |
| October 2020 | 0.25% | 0.10% | 0.90% |
| November 2020 | 0.10% | 0.05% | 0.81% |
| December 2020 | 0.10% | 0.05% | 0.90% |
| February 2021 | 0.10% | 0.03% | 1.09% |
Property
In the residential market, data from CoreLogic listed below, shows a continually bullish story. Lots of interest and activity in all markets. The Regional pull remains the strongest, but markets like Perth are a real surprise too.
Despite some likely tapering off of Government support during 2021 - property markets remain stimulated by record low borrowing costs and low stock levels.
Commercial Property
The property sentiment is also strong in commercial property. Whilst office property had its worst year in nearly a decade, the last quarter of 2020 was surprisingly strong.
In more positive developments for the sector, Mirvac Group plans to start construction later this year on a $1 billion-plus, two-tower mixed-use project in the Melbourne CBD - This includes a 45,000-square-metre, 20-level office tower, and a 32-level build-to-rent tower with 472 apartments.
Industrial property transactions have been offsetting the inactivity in office, with $2 billion invested into the logistics sector in the last quarter of 2020 alone.
Currency
The currency position for Australia remained steady over the Christmas/New Year period. This includes both the USD & Eurozone.
The strength of commodity prices, including iron ore, has continued to support our currency amongst other drivers.
As we continually state, a strong dollar will put downward pressure on our interest rates.
Until next time.