Lowe Leaves Rates Alone as He Prepares To Leave Role

Reserve Bank of Australia governor Philip Lowe made a quiet exit from the top job on Tuesday, leaving the official cash rate unchanged at 4.1 per cent for the third month in a row.

While the RBA board’s decision was largely expected by economists, Australian homeowners and renters will be breathing a collective sigh of relief after watching interest rates rise by four percentage points since May last year.

In one of his last acts as board governor, Lowe said the higher interest rates were working to establish a more sustainable balance between supply and demand in the economy and would continue to do so.

“Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline,” Lowe said after the meeting, but would not rule out further interest rate rises.

“But inflation is still too high and will remain so for some time yet. While goods price inflation has eased, the prices of many services are rising briskly,” he said.

“Rent inflation is also elevated.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks.”

CoreLogic’s research director Tim Lawless warned Consumer Price Index (CPI) rents remained a major inflationary driver.

He said the monthly CPI indicator showed a 7.6 per cent increase in the cost of rents in the 12 months to July, up from 7.3 per cent in June.

“The trend indicates no slowdown in growth for rents paid,” Lawless said.

“Although CoreLogic’s timelier rental index has recorded a fourth consecutive month of slowing rental growth, CPI rents show around an 18-month lag, suggesting rental prices are likely to add to inflationary pressures for some time yet.”

Lawless said it may be too soon for a pause in the cash rate to have a significant impact on purchasing demand.

“Although housing values have trended higher in the past few months, the recovery trend is occurring across volume that remains slightly below the five-year average.

“A more robust recovery in housing market activity is likely to be constrained by high interest rates and affordability hurdles in the short- term.”

▲ Economists warn housing rents remain a major inflationary driver.

Ray White Group’s chief economist Nerida Conisbee agreed.

“Advertised rental growth is starting to slow but it will take some time for it to flow through to properties already rented,” she said.

Interest rate levels were also exacerbating rental and price growth because of their impact on the number of new homes being built. 

“Already, housing approvals have fallen to levels not seen in around ten years.

“With housing finance costs so high, this is discouraging both owner occupiers and investors from buying new properties. Fewer properties being built will push more people into buying or renting existing homes.

“The rents/rates spiral has a while to run.”

AMP head of investment strategy and chief economist Shane Oliver said leaving the rates on hold was consistent with the run of softer data for jobs, wages and inflation seen during the past month.

“Our view remains that the RBA has already done more than enough to slow the economy in order to rebalance demand and supply and bring inflation back to target.” 

Oliver said there was increasing evidence rate hikes were biting with falling real retail sales, Australian Bureau of Statistics’ data indicating a fall in household spending, a sharp fall in building approvals, slowing business investment plans, and slowing GDP growth.

He said retailers were pointing to slowing demand in the recent profit reporting season, rising insolvencies, indications of a slowing jobs market, softer than expected wages growth and a faster than expected fall in inflation. 

“As a result of ongoing rate hikes, the risk of recession in the next year is very high.”

While rates were again left unchanged, the rate hikes in the past 16 months mean a variable rate borrower with a $600,000 mortgage will have seen $1300 a month added to their mortgage payments.