RBA keeps interest rates steady as banks signal cuts will have to wait

The board held its fifth meeting of the year on Tuesday following a month of reports of tumultuous relations with the government as both continue to try to tame inflation.

The decision to keep interest rates stable for more than ten months comes after key Australian Bureau of Statistics inflation data released earlier this month showed some small-scale growth for the Australian economy, but revealed a sixth consecutive quarterly decline for gross domestic product per capita.

The decision to keep Australian rates flat came after the US Federal Reserve's slashing of interest rates from a 23-year high by half a percentage point last week.

The move is the first reduction in four years for the most influential central bank and follows similar moves made across Europe, the UK, New Zealand, and China. 

At a press conference following the meeting, governor Michele Bullock said inflation was still too sticky and above target.

"Progress in getting underlying inflation down had slowed," she said. "The level of demand is still above the economy's ability to supply goods and services."

A bumpy ride

Despite recent data showing the Australian economy is tracking through a period of weak growth, PropTrack senior economist Eleanor Creagh said the sustained pause on rates makes it clear the Reserve Bank is still trying to balance downside risks for growth and the labour market.

The unemployment rate rose to 4.2% in July, with the number of unemployed growing by 24,000 people and employed by around 58,000.

“Households are under pressure and retail sales and consumption are weak, while consumer sentiment remains low,” Ms Creagh said. “Though employment growth has remained strong, and the unemployment rate held steady at 4.2% in August, the labour market has softened over the past year.”

PropTrack senior economist Eleanor Creagh says the Reserve Bank of Australia has a lot to balance. Picture: realestate.com.au

Markets have not moved substantially after the announcement, with the ASX 200 down (-0.2%) to 8134 points as of 3:30pm.

The Australian Stock Exchange (ASX) RBA Target Rate Tracker last week predicted homeowners could be set to benefit from four rate cuts over a seven-month period next year.

For now, however, Mortgage Choice chief executive Anthony Waldron said inflation levels “are still not low enough for the RBA to consider cutting the cash rate yet”.

“The ABS revealed that annual economic growth over the June quarter was the slowest since the 1991-92 financial year, suggesting that current interest rates are putting downward pressure on Australia’s economic growth,” he said.

Home prices

While inflation has started to ease, the economy’s journey to the 2-3% target remains fraught with hurdles.

Prior to the release of today’s data, the RBA’s rate tracker put the chance of a rate cut at just 10%, largely linked to elevated price pressures and low consumer sentiment.

This backed up predictions from Westpac, National Australia Bank and ANZ that rate cuts will have to wait until next year. Only the Commonwealth Bank is expecting any downward movement in 2024, having pushed back its November prediction to December.

The cash rate has been increased 13 times since May 2022 – a hard pill to swallow for Australians holding variable home-loans or trying to get onto the property ladder.

Mortgage Choice chief executive Anthony Waldron says the spring selling season is well underway. Picture: realestate.com.au

After more than two years of rising rates, Australian homeowners would notice a tangible difference from even an 0.25% rate cut.

However, Mr Waldron said today’s decision will be “welcome news to borrowers and hopeful buyers looking to get a foot on the property ladder”.

Home price growth has persisted despite the high-interest rate environment, with prices in August cycling through 20 consecutive months of growth.

Australia’s median home value is currently sitting at $790,000, according to the PropTrack Home Price Index for September.

Perth recorded a monthly home price growth of 0.8%, the largest of any state or territory capital, while Melbourne was the only capital to see a decline (-0.2%) in August.

Strong growth for August was also seen in Hobart (0.6%), Adelaide (0.5%), Brisbane (0.4%).

Though prices lifted nationally by just 0.2% – the smallest monthly increase since prices stopped falling in late 2022 – Ms Creagh said a boost in spring listing numbers would likely bring further price increases.

“Home prices are expected to rise in the period ahead as activity ramps up into the spring selling season,” she said. “However, the expected uplift in choice, the uncertainty around timing of interest rate cuts and affordability constraints are likely to reduce the pace of price growth."

Ms Bullock this afternoon blamed strong house price growth on the imbalance between demand and new housing supply.

Opportunities on the horizon

Mr Waldron said both prospective buyers and those already on the ladder can take steps to prepare themselves for calmer waters.

“If you are hoping to buy in spring and don’t yet have a pre-approval, I’d encourage you to meet with a mortgage broker to get pre-approval sorted and ensure you’re in a position to make an offer as soon as you have found a property to purchase.

“For borrowers who have not reviewed their loan so far in 2024, now is a great time to meet with a broker to check your loan still meets your needs.”

Home loan submission data from Mortgage Choice shows borrowers are continuing to opt for variable home loans for now.

In August, just 3% of loans had a fixed component, a trend Mr Waldron confirmed is continuing so far into this month.

Where to now for inflation?

In its statement on monetary policy released alongside today's decision, the RBA confirmed its forecasts do not see inflation "returning sustainably to target" until 2026. 

The central bank also confirmed households were not spending and noted the "ongoing effect of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption".

"However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, remained more resilient."

The RBA said its policy is "currently restrictive and working broadly as anticipated" but acknowledged uncertainties.

"The central projection is for household consumption growth to pick up in the second half of the year as the headwinds to income growth recede – but there is a risk that this pickup is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market.

"More broadly, there are uncertainties regarding the lags in the effects of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight."

Inflation figures tomorrow will likely paint a more promising picture that in recent months however, with wide-spread speculation among economists that the Consumer Price Index will drop from its current level of 3.8%.

Treasurer Jim Chalmers is expecting to see positive data on inflationary trends from the Australian Bureau of Statistics tomorrow. Picture: Getty

Deloitte Access Economics partner Stephen Smith said the current economic dynamic "won't last forever".

"Inflation remains on its way down, albeit in an uneven way, with much of the inflationary pressures in the economy occuring on the supply side," he said.

Speaking on Sky News this week, Mr Chalmers optimistically said he expects tomorrow’s figures to be “welcome progress towards lower inflation”.

“Whether it’s in the low threes or in the high twos, what it will show is that inflation in monthly terms is around half what we inherited a couple of years ago when we came to office, so that would be welcome and encouraging progress.

“What we’ve seen over a period of time now is inflation has come off quite substantially.”

Breaking under 3% this week will further fuel the likelihood of a November rate cut, providing some much-needed relief to Aussie homeowners in time for Christmas.