Steady As She Goes: RBA Holds Cash Rate

Australia’s 3.8 million mortgage holders breathed a collective sigh of relief on Tuesday as the Reserve Bank of Australia decided to leave the country’s cash rate target unchanged at 4.1 per cent.

As protesters gathered outside the RBA’s headquarters in Martin Place in Sydney, the board of governors inside agreed to leave rates as they are, saying the inflation rate in Australia has passed its peak and the monthly Consumer Price Index (CPI) indicator for May showed a further decline.

Interest rates have risen 12 times in the past 14 months, increasing by four percentage points since May last year.

Reserve Bank Governor Philip Lowe said holding rates steady would provide the board time to assess the impact of the increase in interest rates to date as well as the economic outlook.

“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Lowe said in a statement after the July meeting.  

“In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month.”

Borrowers with a $500,000 loan are already paying an extra $1217 a month for their mortgage, making their total monthly payments $3320.  That’s an increase of 58 per cent from April last year.

The average new home loan for an existing property in Australia is about $587,517.  But in New South Wales that rises to $713,545.

Lowe warned inflation was still too high and would remain so for some time.

“High inflation makes life difficult for everyone and damages the functioning of the economy,” he said.  “It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. 

“Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels.”

He said the combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. 

He did not rule out further interest rate rises.

▲ Economists agree RBA governor Philip Lowe is not yet finished with interest rate rises.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

Investment specialists Franklin Templeton said the RBA was now trying to finesse policy to avoid a hard landing.

“It’s a delicate process as policy is already very restrictive in our view and they could have made a case to lean into the slowdown in inflation from here,” director of fixed income Andrew Canobi said.

“The interesting aspect of this decision is the reasonably dovish tone.

“The outlook is conditional from here on upcoming inflation and employment indicators and their tightening bias has been softened again.  If we see key data ease in July, we may see more conviction emerge that the peak is in.”

Canstar, a financial comparison website, expects at least two more cash rate rises this year.

Canstar’s Steve Mickenbecker said the annual inflation rate falling by 1.2 per cent last month had been enough for the RBA to hit the pause button.

“Adjusting for volatile items, the improvement in inflation from April to May was modest and would have disappointed the Reserve Bank,” he said.

“The Bank puts more faith in the more robust quarterly inflation number than the interim monthly numbers and its next step will be heavily influenced by the quarterly release later this month.”

He said with unemployment at 3.5 per cent, wage pressure would add fuel to inflation.

“For now, we have to anticipate at least two more cash rate rises this year and can’t expect the cash rate to fall until 2025.”

Finder, another financial comparison site, agreed, saying the RBA’s pause might be a breather, but did not signal the end of rate rises.  And head of consumer research Graham Cooke said the decision could have gone either way.

“The latest inflation figures made a strong case for the RBA to pause its series of rate hikes,” he said.

“However, the RBA repeatedly states that its intention is to get inflation all the way to the target rate of 2-3 per cent and we aren’t there yet. While homeowners have been given a break this month, they should buckle up for further hikes this year.”

Innes Willox of the national employer association Ai Group called the RBA’s decision “prudent.”

"As the Reserve Bank made clear in today's announcement, inflation is still too high and further rate rises may be required and it remains imperative that businesses, governments, and employees continue to exercise restraint in setting prices and in wage negotiations,” Ai Group’s chief executive said.