RBA finally hits pause button on interest rates

Australian borrowers have finally been given a reprieve from almost a year of interest rate hikes.

The Reserve Bank of Australia (RBA) Board has just announced that it has decided to leave the official cash rate unchanged at 3.60 per cent.

In making the announcement, the RBA gave borrowers cause to rein in their joy, saying it expects more interest rate rises in coming months as it contends with inflation that is still high, at 6.8 per cent.

Today’s decision follows a cumulative increase in interest rates of 3.5 percentage points since May last year.

RBA Governor, Philip Lowe, said the Board expects some further tightening of monetary policy, that is, interest rate rises.

He also repeated his monthly mantra that “the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”.

“The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty,” Mr Lowe’s Monetary Policy Decision for April noted.

“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

His use of when, not if, will quell homeowner celebrations for now.

Rates likely nearing their peak

Calls for a pause in the cycle of rate hikes had been growing but the decision was still only predicted by about one in three economists.

Graham Cooke, head of consumer research at Finder, said the decision would come as a big relief to millions of mortgagees.

“Homeowners deserve a break from the relentless increase in pressure and can finally breathe a sigh of relief,” Cooke said.

More than a third (36 per cent) of Aussie homeowners said they struggled to pay their mortgage in March, according to Finder’s Consumer Sentiment Tracker. 

Its panel of 42 experts and economists now forecast that the cash rate will peak on average at 4 per cent, with 70 per cent of those who weighed in saying it will peak between April and July this year.

If the cash rate were to peak at 4 per cent, that would mean $15,000 more in interest on the average home loan of $600,000.

Average Aussie mortgage repayments

Source: Finder, RBA. *Owner-occupier variable discounted rate. Repayments based on the average loan of $601,252 (ABS data analysed by Finder).

What the rates decision means for property prices

Steve Douglas, Executive Chairman, SMATS Group, welcomed the RBA’s decision as a sensible move that would alleviate recession concerns, help the building industry, and ease the strain on borrowers, but added that property prices may respond too.

He also noted the tone of the RBA Board suggested we hadn’t seen the last of the interest rate rises.

“With interest rates still likely going up, what are going to see over the next six to 18 months is people that were thinking about selling, with a reasonable mortgage on their property, are going to be far more motivated to sell because the cost of retention has just gone up from 2 per cent interest rates to fives and sixes,” he said.

“The problem we have is that it is still taking a long time to build, a long to bring stock on, a long time for approvals, and there’s not enough stock to cope with the new influx of migration.

“We have major housing supply problems while property demand is actually strong and rising, and if you have soft supply and high demand, logic tells you prices will hold or rise – simple as that.”

CoreLogic Research Director, Tim Lawless, said an increased level of certainty around the rate hiking cycle should flow through to an improvement in consumer sentiment, which has been stuck at levels seen during the worst of the Global Financial Crisis and early phase of the pandemic.

“We know that consumer sentiment and housing market activity have a close relationship, so any upwards movement in spirits could see more buyers and sellers returning to the market, although we would need to see sentiment lift materially before returning to average levels.

“Despite the highest interest rates since 2012, we have seen a lift in housing values over the past month; a timely reminder that interest rates are but one of the many key factors influencing housing trends,” he said.

CoreLogic reported a 0.6 per cent rise in the national Home Value Index for March, following six months where value declines were losing momentum.

“While we aren’t certain if March marks a turning point for housing values, it’s clear that low advertised supply, the tightest rental conditions on record and surging overseas migration are providing some positive momentum to housing markets.”

RBA’s difficult balancing act

Given the effect of interest rates on inflation is delayed for weeks or months, the RBA’s task in knowing how far to go with interest rises is a tricky one.

Mark Humphery-Jenner, Associate Professor of Finance, UNSW Business School, said inflation data lags in two respects.

“In Australia, the situation is worse than in the US where inflation data is reported monthly as opposed to quarterly in Australia,” he told API Magazine.

“Predicting inflation is also notoriously difficult, thus, the RBA is in the unenviable position of setting policy based on old data and inherently hamstrung predictions.

There appears to be little political appetite to cut expenditure.

- Mark Humphery-Jenner, Associate Professor of Finance, UNSW Business School

“Rates also impact inflation with a lag and this is especially the case where there are fixed rate mortgages.

“Here, many consumers feel the impact of the rate hike months after the hike is announced.

“The looming mortgage cliff demonstrates this.

“The RBA should consider the imminent impact of interest rates on mortgage repayments when setting policies, however, some of the RBA’s rhetoric suggests a degree of complacency about the mortgage cliff.”

Mr Humphery-Jenner said that given the strain consumers were under, the looming mortgage cliff, and broader global headwinds, it seemed unlikely the RBA would hike above 3.85 per cent at this point.

“However, unless inflation shows signs of significant progress, the risk of another hike remains a real possibility,” he added.

Philip Lowe’s blunt inflation tool

The University of New South Wales associate professor of finance said that while interest rates left RBA as something of a one-trick-pony, other methods of fighting inflation were also flawed.

“Some suggest using tax policy, however, taxes are inherently sticky.

“Once taxes increase, it is difficult to reduce them, so they are a bad tool to address inflation.

Mark Humphrey-Jenner, Associate Professor, School of Banking and Finance, UNSW

“They also target one section of the community: those unlucky enough to be ‘othered’ by the government of the day into being targeted,” Mr Humphery-Jenner said.

He then addressed the prospect of forced savings as a solution.

“This would reduce overall spending, however, it might just kick the can down the road.

“If the money is locked in savings now, then once it is unlocked, we will simply have inflation.

“Given the government’s approach to superannuation, one also wonders whether having yet another mandated investment would be palatable.”

He said forced investments themselves could also be inherently inflationary.

“After all, if the money goes into treasuries, a bank account, or company stock, then this enables expenditure by someone else, even if it is not the consumer themselves.”

One way of tackling inflation, he said, was to have the government show some fiscal discipline by reducing spending and showing a genuine attempt to rein in areas that have seen a clear blowout.

“There appears to be little political appetite to cut expenditure.

“It appears more popular to increase expenditure and target a specific unsympathetic group to pay for it than it is to exercise fiscal restraint.”