The Reserve Bank of Australia (RBA) upgraded its growth forecast for our economy even as it held interest rates at record lows today.
The Australia dollar dipped slightly on the news to US77.45 cents while the S&P/ASX 200 Index (Index:^AXJO) held on to its 0.4% gain.
While the decision to keep rates at 0.1% wouldn’t surprise anyone, there are three key takeaways for ASX investors.
RBA upgrades GDP forecast
The first is the upgrade to the Australian gross domestic product (GDP). The central bank upgraded its forecast again and is predicting growth of 4.75% this calendar year. That’s a sizable step up from the 3.5% that it was expecting before.
The RBA may have kept its 2022 GDP forecast unchanged at 3.5%, but remember that comes off the upgraded base, which is now expected to be around $20 billion bigger.
“The economic recovery in Australia has been stronger than expected and is forecast to continue,” said RBA governor Philip Lowe.
“This recovery is especially evident in the strong growth in employment, with the unemployment rate falling further to 5.6 per cent in March and the number of people with a job now exceeding the pre-pandemic level.”
Inflation? What inflation?
The second notable point is how unfazed the RBA is when it comes to the risk of inflation. While global bond markets are starting to price in high inflation due to the amount of monetary stimulus in the system, the RBA noted price pressures remain subdued.
“A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest,” said Dr Lowe.
“In the central scenario, inflation in underlying terms is expected to be 1½ per cent in 2021 and 2 per cent in mid 2023.”
In other words, inflation is tipped to stay comfortably below the RBA’s target band. This gives our central bank flexibility in boosting support wherever and whenever it deems necessary.
Cheap bank funding coming to an end
The third takeaway is the expiry of the RBA’s term facility on 30 June this year. The RBA is not considering extending this facility, which allows ASX banks to borrow from the central bank at a 0.1% rate for three years.
I believe the facility enabled banks to offer record low three-year fixed mortgages at around 2%. The banks pick up and easy circa 200 basis point net interest margin for little to no risk.
There are two possible reasons behind the RBA’s move to close down the term facility.
Keeping a watchful eye on the housing market
Firstly, the central bank is taking note of the hot property market.
The RBA is monitoring the trends in housing borrowing and highlighted the importance of maintaining lending standards.
The other is the fact that only half of the $200 billion term loan facility has been used this far. Banks don’t seem keen on borrowing much to lend.
That may be a good thing as it could mean they are also worried about maintaining borrowing standards.
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