Later on Tuesday the board of the Reserve Bank of Australia will decide if it will keep buying government bonds at its current rate of $5bn a week. But it will not be considering raising the cash rate – and it’s been so long since interest rates were raised that what was once a “neutral rate” has become much lower.
When the pandemic hit, the RBA knew it needed to do something extraordinary. And so, aside from cutting the cash rate to 0.25% and then 0.1%, it also began a massive amount of government bond purchases. This essentially puts more money into the economy and spurs growth.
But in July things looked to be going well and so the Reserve Bank announced it was planning to wind back or “taper” its bond purchases from $5bn a week to $4bn some time in “early September”.
It was not the greatest time to think that things were going well. New South Wales was 21 days into the Delta outbreak and the highest number of cases recorded in one day was just 35:
In August the Reserve Bank “considered the case for delaying” this tapering but decided it would not. But it noted that it “would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery”.
That certainly has happened, and given inflation expectations have also fallen in the past few months, there is a strong likelihood that the RBA will ditch its old timetable:
But it remains fully committed to not raising the cash rate “until actual inflation is sustainably within the 2 to 3 per cent target range”. It does not expect that to occur until “before 2024”.
And yet even if that were to occur, it is unlikely we will ever see interest rates back at the higher levels seen in the past 20 years, let alone those of the 1970s and 1980s.
Today will mark the 130th consecutive month the RBA has gone without raising the cash rate.
When the Reserve Bank last raised rates, the record length of time a major central bank had gone without a raise was the Japan central bank, when it went 119 months through the entire 1990s.
The RBA broke that record back in November last year, although the Bank of England had in that time set a new record of 123 months. But no matter, the RBA broke that new record too, in March:
The Reserve Bank has now gone a full six years longer than the previous longest stretch it went without raising rates.
Should rates remain at 0.1% till 2024, a person would have been able to go through their entire school life without witnessing a rate rise.
That length of time has a major impact on not just the economy but people’s own finances. It means what people can cope with has altered.
Back in November 2010, when the Reserve Bank last raised the cash rate, it was bumped up to 4.75%. That was actually the median rate of the previous five years, which is a good quick and dirty guide for the “neutral rate” – a point that does not either slow or stimulate the economy to any great extent.
Back then the median Sydney mortgage was just under $600,000; now it is $1.05m – a 75% increase. In that time wages in NSW have risen by 28%:
House prices have risen by so much more than income that interest rates could not rise to previous levels without destroying the economy.
But the rate we are used to has also fallen.
The five-year median rate is now just 1.5%. If rates remain at 0.1% until 2024 then incredibly that will be the new five-year median by then.
And the history from overseas shows rates don’t go back up.
In 1990, the Japan official rate was 6%; by the time it next went up in 2000 it had fallen to 0% and then rose to 0.25%. In the 21 years since it has never gone above 0.5%.
If that sounds unlikely to occur here, just note our path to 0% rates is not greatly different to that of Japan:
For mortgage rates to go from under 5% to 10% and higher, as occurred from the 1960s to 1970s and 1980s, it would require a level of inflation growth that is completely foreign to us now:
And so while the RBA ponders what to do about bond purchasing, one thing seems clear: while interest rates will inevitably rise again one day, they are very unlikely ever to go back to levels they once reached.