Lenders have slashed variable mortgage rates to attract new customers in the booming pandemic property market, even as the Reserve Bank keeps official interest rates firmly on hold.

At its meeting today, the Reserve Bank left its official cash rate target on hold at the record low level of 0.1 per cent, which is where it has been since November last year, although it did extend other stimulus measures in response to the COVID Delta outbreaks, as explained later.

However, while official interest rates have remained on hold, lenders have been busy slashing their variable mortgage rates.

RateCity reports that the number of variable rates on its database under 2 per cent has jumped from 28 to 46 in just two months. This is also more than three times the number of sub-2 per cent variable rates at the start of the year.

The cheapest of them sits at just 1.77 per cent, although the average variable rate for new customers is 2.72 per cent.

However, there is a trade off. While variable interest rates are continuing to fall, along with short-term one and two-year fixed mortgages, longer term fixed rates are generally rising from the record lows set earlier this year.

There were 32 four-year fixed loans with an interest rate below 2 per cent at the start of the year, as well as three five-year fixed loans below this benchmark. Now there are none.

"Since COVID, the battleground for the banks has been fixed rates. However, with record numbers of customers now locked in, some lenders are shifting their sights to variable rates," said RateCity's research director Sally Tindall.

"Banks need to be winning new business, not losing it, if they want their loan books to keep moving in the right direction.

"Well over half of all mortgage holders are still on a variable rate. That's a huge market of potential refinancers for the banks to target."

What did the Reserve Bank do?

While leaving the cash rate target on hold at 0.1 per cent, the interest rate on banks' accounts with the RBA at 0 per cent and the bond yield target of 0.1 per cent aimed at Commonwealth securities that mature in April 2024, the Reserve Bank made one small move to extend stimulus.

In August, the RBA said it would reduce its government bond buying program from $5 billion to $4 billion in early September and continue that rate of purchases until at least mid-November.

However, the bank has now committed to extending the $4 billion a week bond buying program until at least mid-February.

Government bonds provide one of the key benchmarks for market interest rates because they are a relatively risk-free return.

By buying bonds, the RBA pushes up their price, which in turn pushes down the yield (or interest rate) on the bonds. This in turn should help push down interest rates offered by financial institutions on products such as mortgages and business loans.

Reserve Bank governor Philip Lowe is confident the economic slowdown caused by lockdowns will be only temporary. However he warned it might take at least a year from the start of the outbreak to get back to where Australia was before Delta hit.

"The Delta outbreak is expected to delay, but not derail, the recovery," Dr Lowe forecast.

"Much will depend on the health situation and the easing of restrictions on activity.

"In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year."

Reaction to the RBA's move

The decision to press ahead with even a small reduction in the amount of bond purchases, even though the program has been extended, caught some analysts by surprise, with many expecting the RBA to back away from its so-called tapering for now.

Fund manager Fidelity's Anthony Doyle said, given the uncertainty about the virus and economic outlook in NSW and Victoria, "arguably an increase in bond purchases rather than a reduction should have been announced at today's meeting".

"NSW and Victoria account for around 55 per cent of GDP, and it is unclear how much economic scarring has occurred due to the extended lockdowns that residents of both states are experiencing.

"Encouragingly, the rate of vaccinations has progressed materially, providing some light at the end of the tunnel for when lockdowns may gradually begin to be removed.

"Undeniably, there is likely to be some pent-up demand from consumers, however this is likely to be mitigated to some extent by those hesitant to return to their normal lives in an environment of heightened COVID-19 cases in the community — rather than none — even if they are fully vaccinated."

Interest rates likely on hold for at least another year

Despite this uncertainty, many economists and most financial traders still expect the Reserve Bank to raise interest rates before 2024, which is the earliest the RBA is expecting to have to move.

"We expect the bank to end its bond purchases in about one year and start to hike rates in early 2023 and lift them to 0.75 per cent by end-2023," Marcel Thieliant, the senior Australia and New Zealand analyst with Capital Economics, said.

"That forecast is more optimistic than the analyst consensus, which doesn't foresee the first rate hike until the second half of 2023.

"But it would be later than what the financial markets anticipate, which are pricing in one 25-basis-point hike by the end of next year."