New warning for households as RBA keeps rates on hold

The RBA on Tuesday left the cash rate at a 12 year high of 4.35%, but didn’t rule out another rate hike if inflation takes too long to rein in.

"Inflation is easing but has been doing so more slowly than previously expected and it remains high," the RBA said in its post-meeting statement.

"The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out."

Recent inflation data shows consumer prices aren’t cooling as quickly as expected, while a strengthening jobs market and looming income tax cuts – set to kick in from July – are expected to underpin spending as households get more money in their pocket.

The RBA held interest rates steady at 4.35% in June. Picture: Getty

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That could see struggling borrowers tread water until well into next year, with financial markets not anticipating the first cut until March 2025.

But one leading economist has warned a rate hike could be just around the corner.

Judo Bank chief economic adviser Warren Hogan says interest rates will need to get “closer to 5%” for the RBA to bring inflation back to target within a reasonable timeframe, predicting hikes in both August and November this year.

“The forces holding the economy back over the past two years will ease over the coming financial year as Australian governments inject tens of billions of dollars into household disposable incomes with tax cuts and cost of living relief,” Mr Hogan said.

“The RBA can continue to wait for inflation to come down. The problem with that strategy is that the longer inflation is in the economy, the harder it will be to get it out."

Judo Bank chief economic adviser Warren Hogan

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The latest forecasts from the RBA anticipate inflation will return to its 2-3% target range by the end of next year, but if this timeline is blown out the RBA may be forced to hike again.

PropTrack director of economic research Cameron Kusher said key inflation data - due to be released just ahead of the August rates decision - will help determine whether the RBA needs to lift rates again or adjust expectations for the timing of an interest rate cut.

“Although rate cuts are now expected in 2025, most still predict the next move will be down,” Mr Kusher said.

ANZ last week became the first big four bank to scrap forecasts of a rate cut this year, now expecting the RBA will remain on hold until February 2025.

Westpac, CBA and NAB still anticipate a cut in November, but have noted risks to the timing of the first move.

“Given the challenging underlying inflation backdrop and a shortening runway between now and November, the risk to our call is increasingly moving towards a later start date for an easing cycle,” said CBA head of Australian economics, Gareth Aird.

Housing market shrugs off rates uncertainty

Growing uncertainty around the outlook for interest rates has done little to dent market activity, with national property prices reaching a new record high in May.

The latest PropTrack Home Price Index rose 0.3% during the month, with prices now 6.7% higher than a year ago despite a strong increase in the number of homes being listed for sale.

“Housing demand remains strong due to population growth, tight rental markets, resilient labour market conditions and home equity gains,” Mr Kusher said.

“Coupled with tax cuts on July 1, which will support real incomes and household spending, we expect that property prices will lift further this year.”

Housing remains a key piece of the inflation puzzle with rising construction costs, labour and rents pushing up prices – a challenge Mr Kusher said was not going away anytime soon.

Borrowers urged not to rely on rate cuts

With forecasts varying widely on the timing of the first interest rate cut, households are being urged not to rely on the RBA to keep their head above water.

A recent Mortgage Choice survey found nearly four in five borrowers had made sacrifices to keep up with their home loan repayments over the past 12 months, with around half eating out less frequently or cutting back on entertainment, such as going to the cinema or concerts.

A recent Mortgage Choice survey found 78% of borrowers have made sacrifices to keep up with their home loan repayments in the last 12 months. Picture: Getty

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Mortgage Choice chief executive Anthony Waldron said others were taking more drastic action to meet their loan repayments.

“Borrowers are not just forgoing experiences and entertainment, 20% are dipping into their savings or emergency funds, 18% are taking on additional work or side jobs, and 7% are seeking financial assistance from family or friends,” Mr Waldron said.

“While borrowers and hopeful buyers are eager to see rate cuts, the Reserve Bank Governor has made it clear that tackling sticky inflation remains a priority.

“It’s a challenging time for borrowers and buyers navigating higher home loan repayments and tight supply in the housing market, which makes a mortgage broker’s advice critical.

“As the end of the financial year approaches, borrowers planning for the year ahead should take a moment to ensure their home loan is still the best option for their current circumstances.”