Interest rates kept on hold as inflation starts to ease

In what was widely regarded as a fifty-fifty call, the Reserve Bank of Australia has taken a wait and see approach to interest rates this month.

Graphic of RBA and bank notes banner that interest rates are on hold
Despite inflation remaining well above the RBA's preferred level of 2 to 3 per cent, it has opted to keep rates on hold in July. (Image source:

Borrowers have been given a reprieve, however briefly, as the Reserve Bank of Australia (RBA) opted to leave rates on hold at its July monthly board meeting held just moments ago.

The official cash rate will remain at 4.10 per cent but RBA Governor Philip Lowe has indicated that it may not yet be the end of rate rises.

Inflation has eased from its peak but is still a thorn in the side of the economy.

Today’s decision is just the second meeting out of 14 that has resulted in a hold since the RBA began raising the rate in May 2022.

Graham Cooke, head of consumer research at Finder, said the decision could have gone either way.

Of 39 expert panellists it surveyed, 49 per cent correctly predicted the cash rate would hold in July.

“The latest inflation figures made a strong case for the RBA to pause its series of rate hikes.

“However, the RBA repeatedly states that its intention is to get inflation all the way to the target rate of 2 to 3 per cent and we aren’t there yet. 

“While homeowners have been given a break this month, they should buckle up for further hikes this year,” Mr Cooke said.

The RBA’s Monetary Policy Statement from Mr Lowe pointed to declining inflation and said the RBA will take some time to assess the impact of the increase in interest rates to date and the economic outlook.

“Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline. But inflation is still too high and will remain so for some time yet.”

The prospect of more interest rate hikes over coming months remains very real.

Economic factors that contribute to high inflation remain elevated.

“Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight,” the RBA statement noted.

“Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels, labour force participation is at a record high and the unemployment rate remains close to a 50-year low.

“Wages growth has picked up in response to the tight labour market and high inflation.”

The RBA statement pointed to wages growth, the labour market, rising house prices and household savings as variables it had to consider in assessing the trajectory of inflation.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending.

“While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.

Global factors also cast a major influence over the Australian economy.

Total increase to monthly repayments since May 2022

Loan size Repayment increases still to come (May + June) Total increase across all 12 hikes
$500,000 $151 $1,134
$750,000 $227 $1,701
$1,000,000 $303 $2,269

Source: Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April.

“There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years,” Mr Lowe said.

But the sting in the tail for borrowers relieved at not having to find more money for mortgage repayments was the hawkish tone that remained in the latest RBA announcement.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

More rates pain likely to come

As painful as interest rate hikes are for borrowers, and unfair on that contingent of the population in the opinion of many, there is a widely held expectation that further interest rate pain is both expected and justified.

Mala Raghavan, Senior Lecturer (Economics & Finance) at the University of Tasmania, said the current inflation rate of 5.6 per cent remains significantly higher than the target range but rate hikes were working.

“A closer look at the CPI figures reveals that two essential household categories continue to exhibit high prices; housing costs remain at a high level of approximately 8.4 per cent, while food and non-alcoholic beverages have increased by 7.9 per cent, thereby impacting the overall cost of living index related to housing.

The economy is in a tug-of-war (and) households and businesses are caught in the middle.

Harry Murphy Cruise, Lead Economist, Moody’s Analytics

“The declining trend of the overall inflation figure indicates that previous cash rate hikes have effectively helped curb inflation.

“Consequently, the RBA should consider implementing one or two additional rate hikes to restore inflation to its target level.”

David Robertson, Chief Economist and Head of Economic and Markets Research at Bendigo and Adelaide Bank, said the breather may only last a month.

“The lower read on monthly CPI does open the door for a pause in RBA rate hikes, however, in another close decision the official cash rate will probably still increase in July as the RBA continues its focus on core services inflation.”

Craig Emerson, Managing Director of Emerson Economics, was more succinct in his reasoning behind the likelihood of more rate hikes.

“The RBA Deputy Governor has said in a speech that the RBA needs to increase the unemployment rate to 4.5 per cent.”

And at the risk of recession, further interest rate rises would fuel higher unemployment.

The RBA has consistently said that strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.

It wants to reduce this demand, which is code for raising unemployment.

Harry Murphy Cruise, Lead Economist for China and Australia at Moody’s Analytics, highlighted the compromised juggling act the RBA had to perform with jobs, mortgage stress and inflation.

“The economy is in a tug-of-war.

“On one side, price rises are pulling cost-of-living pressures higher; on the other, the RBA has been hiking rates more aggressively than at any point in its history.

“Households and businesses are caught in the middle.

“As it stands, the RBA has its nose ahead in the contest.

“The economy is slowing, spending is going sideways, and firms are cutting their hiring plans.

“All that is helping to bring down inflation but the RBA isn’t willing to take any chances and the board struck a notably hawkish tone at its June meeting, flagging that more rate hikes are a distinct possibility.

“With data since then showing unemployment dropped back to 3.6 per cent in May, additional tightening is likely and we expect one further rate hike in coming months, taking the cash rate to 4.35 per cent,” he said.

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The Reserve Bank of Australia (RBA) kept interest rates at 4.10 per cent at its July 2023 board meeting.

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