Christmas reprieve as interest rates left unchanged

With the release of new research showing the average borrower has paid more than $24,000 extra in interest as a result of the RBA rate rises over the last 20 months, news of a December rate hold will come as a relief to millions of borrowers.

New RBA Governor Michele Bullock had held rates steady in her first monthly cash rate decision, raised rates 0.25 per cent in November and decided on Tuesday (5 December) to again hold in response to declining inflation.

The decision was widely expected, with more than four in five experts (82 per cent) from Finder’s RBA Cash Rate Survey tipping the RBA would hold the cash rate at 4.35 per cent.

Borrowers have already been hammered by the 13 rate rises in 2022 and 2023 that the RBA had previously said were not likely until 2024.

The research shows the average borrower with a $500,000 loan at the start of the hikes will have paid an estimated $24,598 more in interest charges in the 20 months between May 2022 and December 2023. This assumes the borrower has not refinanced or renegotiated their loan in this time.

Despite this month’s decision, the prospect of further interest rate rises is not being ruled out.

The monthly consumer price index (CPI) indicator recorded a fall in inflation from 5.4 per cent at the end of the September quarter to 4.9 per cent by the start of November.

Adjunct Professor Noel Whittaker, QUT Business School, said the RBA governor had made her position clear.

“Michelle Bullock has made no secret of the fact she won’t be scared to increase rates if inflation doesn’t come down.

“Her stated view is that inflation hurts everybody but rate rises only hurt one section of the community but, having said that, inflation did come down last week so the trend is in the right direction.

“Given the pressure on household budgets that will unfold when the Christmas bills arrive in January, I think they will hold and adopt a wait-and-see attitude.”

Geoffrey Kingston, Honorary Professor, Macquarie University, said that though small the October CPI was enough for the RBA to sit tight in December.

“There is a perceptible slowing of the economy, to the extent no more hikes may be needed, although a further hike can’t be ruled out.

“With the slowdown becoming more pronounced in the second half of 2024, September may see a cut.”

International influence on future of rates

Ms Bullock again hinted that the next rate movement would likely be up before it was down, saying that “the further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

Many of those risks come from outside Australia.

“There also remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad,” Ms Bullock’s Monetary Policy Decision noted.

The OECD has forecast that average inflation in the G20 economies will ease only gradually, falling to 5.8 per cent in 2024 and 3.8 per cent in 2025, compared with 6.2 per cent in 2023. 

While the US appears set to make rate cuts in the new year, Clare Lombardelli, OECD chief economist, said that while the organisation expected a “soft landing”, it was too soon to cut borrowing costs.

She said the OECD expected the European Central Bank and the Bank of England to hold benchmark rates at their current peaks until 2025 — much longer than the markets are expecting — because of persistent inflationary pressures.

While inflation is still too high in Australia in the eyes of the OECD, another factor weighing on local households is also working to push interest rates down.

Wages growth, lagging well behind inflation, is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up. The RBA noted that conditions in the labour market also continued to ease gradually, although they remain tight.

“High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment,” Ms Bullock said.

“Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market.”

Refinancing out, bigger loans in

While the value of new owner-occupier and investor lending picked up pace in October, the value of refinanced mortgages plummeted again.

The latest ABS lending indicator data for October, released Monday, shows the value of refinanced loans dropped by $1.31 billion from the previous month and down over $4.2 billion compared to the peak in July 2023.

Owner-occupier and investor lending increased by 5.4 per cent and 5.6 per cent respectively.

Rising property prices across the country had a large part to play in the higher levels of borrowing but the number of new loan commitments in October, in seasonally adjusted terms, posted a more modest rise of 2.8 per cent for owner-occupiers.

The average new loan size hit record highs in Queensland, South Australia and Western Australia while NSW, Victoria and the ACT recorded monthly rises, but are still down from the peaks in January 2022.

RateCity.com.au Research Director, Sally Tindall, switching lenders might be on the decline, but it’s coming off the back of the largest refinancing event the country has ever seen.

In the space of 18 months, over $344 billion in mortgages have refinanced across more than 670,000 loans.

“While some borrowers can’t refinance because they’re in mortgage prison, there’s likely to be plenty more out there that could benefit from switching lenders.

“Concerningly, the average new loan sizes increased across all but two states and territories.

“These record loan sizes come despite the persistent RBA cash rate hikes, as buyers keep pushing the boundaries of their finances to get into an incredibly tight property market.

“The rise in the value of new loans also reflects the continued surge in property prices, posting a 5.6 per cent rise this month in dollar terms but just a 2.8 per cent increase in the number of new owner-occupier loans.

“The current property market is a tough proposition for many would-be first home buyers looking to find a way in.”