Fresh predictions: Rates will hold ‘until 2020’

RESERVE Bank Governor Philip Lowe has sparked a frenzy of fresh predictions that rates will hold at 1.5 per cent until 2020 — a boon for home loan borrowers but hell for retirees depending on interest income.

Mr Lowe virtually locked in interest rates at 1.5 per cent after telling guests at a Reserve Bank Board Dinner last night that the best thing RBA could do for Aussies “is hold the cash rate steady” while the country progressed towards full employment and inflation improvements.

Mr Lowe said he did not expect inflation to rise toward 2.5 per cent “for a while yet” saying it would increase “over the next couple of years” — mostly because of slow wages growth.

“The Board’s view is that while this progress is occurring, the best contribution we can make to the welfare of the Australian people is to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence. So that is where we are at the moment,” he said.

He said that “reflects our view that the progress in moving towards full employment and having inflation return to the middle of the target range is likely to be only gradual”.

The cash rate target has been at 1.5 per cent since August 2016 — “that is for 21 months — which is the longest period without a change”, he acknowledged.

The board, he said was “conscious that our ultimate objective is enhancing the economic prosperity and welfare of the Australian people”.

AMP Capital chief economist Shane Oliver couldn’t see any option but for rates to remain on hold until 2020 — and would not rule out the fact that there could even be a further cut.

“A rate hike is now unlikely until 2020: as growth is likely to remain weaker than the RBA expects; wages growth and inflation are likely to remain low for longer; bank lending standards are tightening further, and; house prices in Sydney and Melbourne are falling with more downside ahead,” he said.

“In fact, raising rates at time of falling house prices could be dangerous. For investors: bank deposits will continue to offer poor returns; Australian bonds offer better returns relative to global bonds; and remain wary of the Australian dollar.”

Mr Lowe said inflation data showed current “CPI and underlying inflation were running marginally below 2 per cent”, which was in line with expectations.

The RBA Governor expected the Aussie economy to “grow a bit faster than 3 per cent” this year and next — “this would be a better outcome than the average of recent years”.

There were gradual signs of improvement in the economy, he said, with business conditions at “around their highest level in many years and the long-awaited pick-up in non-mining business investment is taking place”.

Infrastructure spending had picked up in states, he said, as well as the number of Aussies with jobs in the past year and consumer spending was “solid, although it is lower than it was before the financial crisis”.

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