The Reserve Bank of Australia still expects there will be no official interest rate rise before 2024, despite economists at the major banks predicting an earlier hike.

The RBA Board kept the cash rate on hold at a record low 0.1% on Tuesday but adjusted other key policies that have also lowered borrowing costs and supported the economy during the coronavirus pandemic.

RBA governor Philip Lowe said the Board did not expect the cash rate to be increased before 2024.

Mr Lowe said the RBA Board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation sustainably within its 2-3% target range.

“I want to re-emphasise the point that the condition for an increase in the cash rate depends upon the data, not the date; it is based on inflation outcomes, not the calendar,” Mr Lowe said.

“The central scenario remains that the condition for a lift in the cash rate will not be met until 2024.”

Mr Lowe’s statement immediately after the meeting dropped reference to 2024 “at the earliest”, but he repeated that line at one stage during remarks to the media and economists later on Tuesday.

Economists at ANZ and Westpac, as well as AMP, expect the RBA will begin raising the cash rate in 2023 on the back of the continuing stronger-than-expected economic recovery.

National Australia Bank economists said there is a probability of the RBA moving in the second half of 2023, while Commonwealth Bank economists expect the first rate hike to be in November 2022.

Mr Lowe said the Australian economy had bounced back earlier and stronger than expected from the coronavirus pandemic, and was on a positive path.

He said the situation had changed from March last year when the RBA introduced its three-year yield target, which had served its purpose of lowering funding costs and reinforcing the Board’s forward guidance about the cash rate.

“The situation today is quite different from that in March last year; we are no longer looking over a cliff but instead transitioning from recovery to expansion,” Mr Lowe said.

“This improvement has widened the range of plausible scenarios for the cash rate.”

The RBA’s decision not to change its yield target reflected that shift in probabilities, he said.

But Mr Lowe made it clear the RBA was not hinting at rate increases in 2023 like other central banks.

The RBA had indicated there was a possibility the economic conditions for rates to rise could arrive earlier than 2024, but its central expectation remained 2024, economist Paul Ryan said.

“I am interpreting this as throwing very strong cold water on the 2022 and early 2023 rate rises,” Mr Ryan said.

“The Bank’s expectation that rate rises won’t occur until 2024 remains the case, but the improved economic conditions that we’ve seen over the past few months mean that there is a higher chance than previously that rates may rise before that. But the Bank still thinks that is not their central forecast.”

Mr Ryan said the RBA’s remarks gave homebuyers the reassurance that rates will remain low for several years.

“It reasserts the certainty that rates are not rising next year as some people were starting to speculate, and still probably not in 2023 as well.”

RBA adjusts other key policy measures

As widely expected by economists, the RBA decided not to extend the three-year yield target beyond the April 2024 bond and maintained it at the current rate of 0.1%.

“Maintaining the target of 10 basis points for the April 2024 bond will continue to keep interest rates low at the short end of the yield curve and support low funding costs in Australia,” Mr Lowe said.

The RBA also announced a more flexible approach to its quantitative easing or government bond buying program. It will continue purchasing government bonds after the current six-month program ends in early September, at a reduced rate of $4 billion a week until at least mid-November.

“The Bank will continue to purchase bonds given that we remain some distance from the inflation and employment objectives,” Mr Lowe said.

“However, the Board is responding to the stronger-than-expected economic recovery and the improved outlook by adjusting the weekly amount purchased. It will conduct a further review in November, allowing the Board to respond to the state of the economy at that time.”

Mr Lowe said the measures announced on Tuesday will provide the continuing monetary support the economy needs as it transitions from the recovery phase to the expansion phase.

He said one near-term uncertainty was the effect of the recent virus outbreaks and the lockdowns. “But the experience to date has been that once outbreaks are contained and restrictions are eased, the economy bounces back quickly,” he added.

While the RBA and the Australian Prudential Regulation Authority do not target housing prices, regulators are closely watching lending standards as property prices surge.

“At the moment I don’t see any evidence that there’s been a deterioration in lending standards but we’re watching that carefully,” Mr Lowe said.

Mr Lowe said regulators were also closely watching trends in household borrowing, noting housing credit growth had picked up.

“What neither APRA or the Reserve Bank want to see is credit growing too quickly relative to people’s incomes.”

Despite the cash rate and therefore variable mortgage rates remaining on hold, fixed mortgage rates for owner occupiers have started to rise from record lows below 2% as banks factor in the likely increase in the cash rate in 2024, a rise in bond yields and higher funding costs.

Fixed rates are expected to continue to rise given the RBA’s term funding facility, a pandemic measure that provided low-cost funding to the banks, expired at the end of June.

Mr Lowe said the facility is providing low-cost, fixed-rate funding for three years and will continue to support low borrowing costs until mid 2024.

Megan Neil

6 Jul 2021

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