Economic uncertainty prompts RBA to pause on interest rates
Departing RBA Governor Philip Lowe has said interest rates were kept on hold for a second month in a row due to economic uncertainty but where are they likely to go from here?
A watchful Reserve Bank of Australia (RBA) has today announced that interest rates have been kept on hold for a second consecutive month.
Interest rates, which have been increased by 4 percentage points since May last year, remain unchanged at 4.10 per cent.
A statement from outgoing RBA Governor Philip Lowe noted that higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month.
“This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
While borrowers are sleeping a little easier for another month, the RBA has not ruled out further rate increases as it wrestles with still-high inflation.
The CPI of 6 per cent is well above the RBA’s preferred band of 2 to 3 per cent.
“The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Mr Lowe said.
There was some slight softening of the RBA’s usually hawkish tone, suggesting a wait and see approach may be replacing the sledgehammer tactics deployed over the past year.
“Some further tightening of monetary policy may be required to ensure inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”
Mr Lowe said Australia’s sluggish economy was a key reason it held off on another rate rise.
“The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while.
“Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1.75 per cent over 2024 and a little above 2 per cent over the following year.”
The interest rate pause to start August was widely anticipated, with Finder’s monthly survey of 43 experts and economists finding 72 per cent had predicted the RBA would sit tight.
The consensus is that some further upward moves were still likely.
Three quarters of those surveyed believe the cash rate will peak between July and September this year. The panel’s forecast for the average cash rate peak is 4.4 per cent.
Interest rates decision a relief for builders
The beleaguered building industry breathed a sigh of relief at news of an interest rate hold.
Despite an urgent need to address the lack of housing supply in Australia, the number of loans issued for the purchase and construction of a new home has fallen to their lowest level since 2008. The number of detached building approvals has fallen to its second lowest month since 2013.
HIA’s Chief Economist, Tim Reardon said the lack of new work entering the pipeline threatens to worsen the housing affordability crisis.
“When the RBA first increased the cash rate there was a record volume of houses under construction, and a record volume of new houses approved, but not commenced. This large volume of work in the pipeline has obscured the adverse impact of rising rates on the wider economy,” added Mr Reardon.
“Compounding the rise in the cash rate, increased government regulatory costs, rising land prices and construction costs are further impeding an increase in the supply of new homes.
Consensus building that inflation is easing
The RBA has expressed some confidence that inflation will track lower over the next couple of years.
The central bank’s forecast is for CPI inflation to continue to decline, to be around 3.25 per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025.
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|Repayment increase still to come (June)
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Others were also optimistic that the worst of the rate hikes may be in the rear view morrow.
Australian Chamber of Commerce and Industry chief Andrew McKellar said inflation was coming under control.
“The impact of the previous rate increases is clearly starting to come through, with household consumption and dwelling investment weakening.
“The Reserve Bank is right to wait and see what the full impact of the earlier rate increases will be.”
A/Prof Mark Melatos, School of Economics, University of Sydney, said inflation appears to be moderating more quickly than expected, but added, “It still remains significantly above the Bank’s target range and there is still upside risk to rates especially if inflation stagnates above the 2 to 3 per cent target.”
There was also no shortage of viewpoints that more rate rises were still to come.
Noel Whittaker from QUT Business School, said the Reserve Bank would have been looking for an excuse to put rates on hold given the amount of anecdotal evidence that the interest rate rises are having some effect on consumer spending.
“However, July has been a big month for price increases, but they are not reflected in last week's CPI figures but they will be in play at next month’s board meeting, so my view is hold this month but increase next month.
“We are not out of the woods yet.”
Jason Azzopardi, CFO, Resimac said the June quarter CPI will allow the RBA to delay further increases for a short period of time.
“I do however believe lowering inflation to the target band will require further increases.”
David Robertson, Head of Economic and Markets Research, Bendigo Bank said upward pressures still remained.
“The RBA board are still likely to tighten policy further but the Q2 inflation data offered the opportunity to extend last month’s pause and gather further data.
“Tight labour markets and stubborn services inflation adds to upside risks, but another pause would be welcome.”