Interest rates held at 4.35% as RBA treads cautiously towards Christmas

Today's decision from the central bank will come as another disappointment to homeowners amid swirling rumours in recent weeks of a pre-Christmas rate cut thanks to positive progress on battling domestic inflation.

The board’s sixth meeting of the year on Tuesday follows Australian Bureau of Statistics (ABS) data last week which recorded the country’s lowest annual inflation rate since March 2021.

Despite this, trimmed mean inflation is sitting at 3.5% – still more than the RBA’s target range of 2-3% – signifying a continued plateau at a 13-year high of 4.35% was to be expected.

Trimmed mean, an alternative measure which discounts certain major price changes, is the bank’s preferred measure of the state-of-play.

At a press conference following the board's meeting, RBA governor Michelle Bullock said she was watching inflation data closely and "wasn't ruling anything in or out".

"Underlying inflation in the September quarter was still too high," she said. "We have made good progress, but as we've seen throughout the year, this last part of the job of getting inflation down is not easy or straightforward."

RBA governor Michele Bullock says people need to remember easing inflation does not mean price decline. Picture: News Corp Australia

Underlying pressure

Hopes were up for a December rate cut after headline inflation fell to its lowest level in three years back in September. For the most optimistic, this prediction moved forward to today following last week’s quarterly inflation figures.

REA Group senior economist Eleanor Creagh said news that inflation had finally eased would still not be enough to shift the RBA’s policy stance yet.

“Although headline inflation is within the 2-3% target, underlying price pressures and a resilient labour market make an interest cut this year unlikely,” Ms Creagh said.

“The RBA is likely to remain on hold unless an external shock, higher unemployment or lower underlying inflation occurs, as it aims to sustainability return inflation to target.”

Mortgage holders squeezed

While economists agree the prospect of a cash-rate cut remains on the horizon for February, Mortgage Choice chief executive Anthony Waldron said the RBA was likely to want to be “more confident that inflationary pressures have eased” before it makes that call.

“Many were hoping to see a cut to the cash rate this month,” he said. “But the ABS Labour Force data showed that the employment and participation rates are at record highs, which could put upward pressure on inflation.”

REA Group senior economist Eleanor Creagh says consumers should not expect an interest cut this side of Christmas. Picture: Supplied

Mr Waldron said mortgage holders who have not reviewed their home loan within the last 12 months should shop around to see whether their loan is still suitable given the challenging environment.

Canstar data from today showed close to one million home loans had been switched to a new lender since the start of the RBA’s rate hikes, with more activity likely as high rates persist into 2025.

Ms Creagh said households remained under pressure and consumer sentiment was noticeably subdued.

“Although employment growth has been strong and unemployment steady at 4.1% in September, the labour market has softened over the past year.

“Slowing employment and inflation may prompt rate cuts from February, but the resilient labour market and stickier components of inflation could delay this timeline.”

Selling season draws to a close

Another month without a rate cut came as the spring selling season reached its end for another year.

The PropTrack Home Price Index for October showed prices had still managed to cycle through 22 consecutive months of growth, with Australia’s median home value currently sitting at $797,700.

Home prices hit a record high in October, though Ms Creagh noted performance differed significantly around the country, with severe cost of living pressures still being felt for many.

Despite monthly price increases across Melbourne (0.5%), Adelaide (0.4%), Perth (0.3%), the Australian Capital Territory (0.3%), Sydney (0.2%), and Brisbane (0.2%), both Hobart and Darwin saw no increase.

“The pace of home-price growth remains slower than earlier in the year as buyers enjoy more choice and high interest rates and affordability constrains remain,” Ms Creagh said.

"While a higher number of properties listed for sale and uncertainty around rate cuts may slow price growth, prices are expected to keep rising as the selling season closes out.”

Christmas chaos

With just one RBA board meeting left for 2024, governor Michele Bullock will have to watch closely for anything between now and February that could derail a much-awaited rate cut. 

Source: PropTrack

There are four weeks to go until Australians are expected to shop up a pre-Christmas storm at the Black Friday sales. The annual frenzy is a cause for concern for the Reserve Bank, which may have to consider a rate rise in December to protect progress made in the fight against inflation.

The cash rate has been increased 13 times since May 2022, with this month officially marking four years since Australians last felt the relief of any level of rate cut.  

Curbing inflation

In its statement on monetary policy released alongside today’s decision, the RBA said the cash rate will "stay restrictive" until the board can be confident that inflation is moving sustainably into its target range.

"Sustainably returning inflation to target within a reasonable timeframe remains the board’s highest priority. The forecasts suggest that it will be some time yet before this is the case, which reinforces the need to remain vigilant to upside risks to inflation," the statement read.

"The current forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out."

ANZ, Westpac, National Australia Bank, and the Commonwealth Bank are all aligned in forecasting a cut for February, with the latter two expecting 1.25% worth of cuts by December 2025.

Mortgage Choice CEO Anthony Waldron said the lack of movement on rates today will have disapointed prospective buyers and mortgage holders alike. Picture: Supplied

In the meantime, all eyes will be on the ABS' next Consumer Price Index to see whether inflation will continue to drop as 2024 comes to a close.

Deloitte Access Economics lead partner Pradeep Philip said both mortgage holders and businesses were now "in limbo" awaiting a rate cut.

"While we should never be complacent on inflation, it is clear that interest rates have done their job. It is the supply side of the economy that should be the real focus when it comes to promoting growth, productivity, and fighting inflation," he said.

"With decades low economic growth, perilously weak investment, a retail recession, and the lack of skilled workers in a tight labour market, the RBA risks getting caught between a weak economy and a looming Federal election. Each month the job just gets tougher."

The next monthly indicator from the ABS will come next week, while the first quarterly figures for 2025 will be published in January, shortly before the Reserve Bank’s highly-anticipated February meeting.