RBA has inflation in its sights but keeps gun in holster - for now

A watchful Reserve Bank of Australia (RBA) has kept the official cash rate on hold at 4.35 per cent at its Tuesday (11 August) meeting, as it grapples with a contest between inflation that refuses to heel and a more fragile economy and housing market.

The decision marked the second time this year rates were left on hold, as pressures on elevated inflation levels eased, housing market sentiment nosedived, and economic growth slowed.

The RBA still had to wrestle with competing influences in the form of a strong labour market, inflationary Middle East conflict issues, and discretionary consumer spending that refuses to dampen.

In announcing the hold decision, the statement from the RBA Monetary Policy Board stressed that inflation was still above its preferred level.

“Following three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and the economy appears to be slowing as expected but inflation is still too high.

“It is not expected to return to around the midpoint of the target range until late 2027 and there are upside risks to this projection.

“With monetary policy judged to be somewhat restrictive, the Board decided to leave the cash rate target unchanged while it assesses how the economy is evolving.”

Previous rate hikes were also seen to be doing their job, buying the central bank some more time to see how those measures would play out towards the end of the year.

“Financial conditions have tightened in response to three increases in the cash rate target this year,” the Board noted.

“There are signs that consumer spending growth is slowing gradually as expected, while growth in business debt and investment is strong.

“Momentum in the housing market has shifted, with housing prices falling in some capital cities and new housing loans declining noticeably.

“Labour market conditions have eased by a little more than expected in recent months. Labour market leading indicators point to only limited easing in the near term.”

RBA’s conundrum

Professor Michael Dockery, a leading labour economist at the Bankwest Curtin Economics Centre, believes the chances of another hike in interest rates following this Reserve Bank Board meeting is much higher than many expect. 

“Markets and economists were widely expecting the RBA to keep rates on hold, but I think the RBA is in a very difficult spot.

“Inflation has now been above the 2-3 per cent target range for a full year and the latest figures show no sign of domestic inflationary pressures easing.

“They can’t just keep saying they won’t hesitate to act to get inflation back in the target zone – we must be close to the point where they risk losing control over inflationary expectations.

“The risk of exacerbating price falls in the housing market might be the thing that saves mortgage holders from another rise.”

Other academics were more bearish about the prospect of further rate hikes.

Three economics experts from the University of Sydney shared a general consensus that rates were already high and likely to remain on hold in the short term.

Dr James Graham, Senior Lecturer, School of Economics, said young people are especially hard hit by higher rates, and there are many quirks of Australian housing and mortgage markets that can make things worse.

“Prior to the RBA’s announcement, interest rates were already high, and this is proving tough for existing and potential homeowners.

“My recent research suggests RBA decisions, particularly rate increases, can have a substantial impact on first-time homebuyers looking to get their foot on the housing ladder.

“Higher interest rates make it harder to get a mortgage from a bank, and raise the cost of servicing if you can get a loan.

“Tighter monetary policy also reduces household incomes, which can reduce savings that households might have used for a home deposit and while lower house prices provide some relief, it’s often not enough to help hopeful homebuyers.”

Associate Professor Andrew Grant, Business School, said high petrol prices are helping the RBA, “as they may be lowering the amount of money Australians have to spend on restaurants or on discretionary goods”.

“The RBA is waiting to see whether the higher fuel prices flow through to household bills before deciding to tackle inflation head-on.”

Dr Luke Hartigan, Senior Lecturer, School of Economics, said the current economic climate pointed towards a cautious approach by the RBA.

“Inflation which remains above its target of 2-3 percent, came in lower than expected in June while the labour market is slowing and the housing market is softening.

“Combined, these outcomes mean there is less need for higher interest rates to constrain aggregate demand and moderate inflation.

“The RBA is likely to remain on hold as long as inflation continues to moderate.”

Borrowers under stress

The Finance Brokers Association of Australia (FBAA) on Tuesday said new data by comparison group OurTop10 shows an 18 per cent increase in national mortgage default risk that is highlighting the growing financial pressure facing Australian households.

FBAA CEO Leo Gagic said the rising risk of mortgage default reflects the combined impact of higher interest rates over recent years and escalating living costs, with many households reaching a financial ‘tipping point’ after years of drawing down savings.

“These findings are not unexpected, as our own published research dating back to 2021 found that thousands of borrowers were vulnerable to even modest interest rate increases after a prolonged period of low interest rates,” he said.

Helen Avis, Director of Finance at Specialist Mortgage, said anyone struggling with repayments should contact their mortgage broker or lender before missing a payment.

“As the RBA continues to maintain pressure on borrowers, more mortgage holders are refinancing or negotiating with their existing lenders to secure more competitive variable home loan rates.”

“Options may include refinancing, negotiating a lower rate, restructuring the loan, extending the term or accessing hardship assistance but early communication generally provides more options than waiting until the loan is already in default.”

The surprising international economy to watch

Mortgage brokers should be keeping one eye on Australia and another on an economy 7,000 kilometres away, one finance expert warned.

Rex Afrasiabi, Director, New Chapter Legal and Bond Property Lawyers, said that beneath the headlines lies “a much more important story” for Australia’s property and lending markets.

“For years, Japanese investors have been significant buyers of Australian government bonds and bank debt, attracted by Australia’s relatively higher interest rates.

“If the Bank of Japan continues increasing rates and Japanese assets become more attractive, that capital could begin flowing back home; the consequence? Australian banks may face higher funding costs, and history tells us those costs don’t always stay with the banks, they often find their way to borrowers.”

Mortgage rates aren’t dictated solely by the RBA. Global capital markets, foreign central banks and international investor behaviour all influence the cost of funding in Australia.

“The takeaway? In today’s interconnected world, a policy decision in Tokyo can ultimately affect a family’s mortgage repayment in Melbourne or Sydney, which is why staying informed on global economic developments has become just as important as following domestic policy,” Mr Afrasiabi said.