RBA holds steady but may have some surprise moves to come
Commentators were unanimous in their expectations the Board would sit tight in the face of stubbornly high inflation but is an interest rate shock in the pipeline?
The RBA continues to perform its balancing act of trying to contain inflation without causing an economic hard landing.
Given all 38 commentators in a Finder survey tipped a rate hold, the decision to retain the official cash rate at 4.35 per cent at its Tuesday (18 June) meeting comes as no surprise.
The RBA did, however, say it won’t tolerate high inflation indefinitely.
The recent falls in the inflation rate reversed last month, when it inched up and spooked borrowers hoping its continued decline would mean a rate cut was imminent.
But short of a major international economic shock that rattled the local economy, a rate cut now seems a distant prospect.
There have been 13 interest rate increases since May 2013 but the latest decision marks the fourth successive hold.
The holding pattern may run for some time yet, although the RBA made it clear that economic uncertainty could see it spring a surprise if that was necessary to contain inflation. Borrowers will have to wait until 6 August for the next RBA meeting.
Australians spending money they don’t have
In making its decision, the RBA indicated it is keen to see the positive of lower unemployment rates continue and mass job losses avoided, but with spending levels contained to ensure inflation fell to within its preferred band of 2 to 3 per cent.
There are worrying concerns that spending is continuing in the face of cost of living pressures and heightened levels of loan delinquency.
Worldpay’s Global Payments Report 2024 revealed buy now pay later (BNPL) use is at an all-time high in Australia – accounting for 15 per cent of eCommerce transaction value in 2023.
Almost half of experts who weighed in (44 per cent) say the current level of BNPL use is alarming.
Finder’s Consumer Sentiment Tracker shows two in five (42 per cent) Australians have used a BNPL service in the past six months.
Those who have used BNPL are carrying an average of $1,073 in debt, up from $916 in 2022.
Spending on property also appeared unlikely to be curtailed in the short term.
Helen Avis, Director of Finance, Specialist Mortgage, said rising property prices were unlikely to be stifled by the RBA.
“With the high migration there is not enough supply, while we have also seen an exodus from Sydney to regional NSW and Queensland that has applied price pressure to those markets.
“So despite the fact that rates are high we are still seeing people buying.
“I had a period earlier this year where my clients were ‘wait and see’, but recently they have had the confidence to buy.
“Some people have cut back on spending and adjusted their finances to manage the increased cost of their mortgages and also the cost of living, but overall clients seem to be coping with the current market conditions.”
RBA keeps it short and sweet
In the RBA’s shortest Monetary Policy Decision in this reporter’s memory, inflation and economic uncertainty were its key themes.
“Inflation is easing but has been doing so more slowly than previously expected and it remains high,” the Board’s statement noted.
“The Board expects that it will be some time yet before inflation is sustainably in the target range (and) while recent data has been mixed, they have reinforced the need to remain vigilant to upside risks to inflation.
“The path of interest rates that will best ensure inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”
On the economic front, the RBA suggested it could be a bumpy road ahead, noting that, “the economic outlook remains uncertain and … the process of returning inflation to target is unlikely to be smooth.”
The possibility of another rate increase is on the cards and that will push many mortgage borrowers over the edge, and take many other Australians with them.
- Peter Boehm, Pathfinder Consulting
Conceding that economic momentum was weak, savings rates and high spending were weighing more heavily than slow GDP growth, a rise in the unemployment rate to 4 per cent and slower-than-expected wages growth.
“There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight,” the RBA noted.
There also remains a high level of uncertainty about the overseas outlook.
“Output growth in most advanced economies appears to have troughed.
“There has been improvement in the outlook for the Chinese and US economies, and many commodity prices have picked up.
“Some central banks have eased policy, although they remain alert to the risk of persistent inflation.
“Nevertheless, geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, remain elevated, which may have implications for supply chains.”
Where the experts expect interest rates to head
The consensus among economists is that rate hikes are finished and the next move from the RBA will be a cut, but the timing is highly uncertain.
Financial markets, based on the ASX cash rate futures, have brought forward the timing of a rate cut from around mid-year 2025 to a fully priced in cut by March of next year. Meanwhile three of the big four banks’ economic units are forecasting a 25 basis point cut in November 2024.
Housing markets seem to be somewhat insulated from higher interest rates, with CoreLogic’s Home Value Index continuing to rise through June, and the combined capitals daily index already 0.4 per cent higher over the first 18 days of the month.
“The RBA made a point of calling out an increase in household wealth via higher housing prices which, together with a rise in disposable incomes, could support household spending,” Tim Lawless, Research Director at CoreLogic Asia Pacific, said.
“Similarly, the volume of home sales is tracking higher than a year ago and above the five-year average, demonstrating consistently strong demand from purchasers despite an array of headwinds including high interest rates, cost of living pressures, low sentiment and stretched affordability.”
The RBA had reason to be patient, according to Matthew Greenwood-Nimmo, Associate Professor of Economics, University of Melbourne.
“Although inflation is still stubbornly high, the RBA is likely to hold the cash rate constant in the near term.
“There are signs of weakness in the economy, and the full impact of past rate hikes is yet to be fully felt,” he said.
Jakob Madsen, Economics Professor at University of Western Australia, pointed to international conditions propping rates up for now.
“The US Federal Reserve fund rate is still more than 1 per cent point above the RBA cash rate and the increasing worldwide government debt-to-GDP ratio is keeping upward pressure on interest rates.”
There is no justification to reduce rates based on current economic data, according to Peter Boehm, Managing Director, Pathfinder Consulting.
“The pendulum is swinging towards an increase because of sticky inflation and a government fiscal policy that is likely to put upward pressures on inflation.
“Plus, I doubt there is a single Australian right now who is not suffering from sustained and ongoing price increases in such areas as utility/energy, health, food and just general living costs.
“By way of example, many charities cannot keep up with demand due to an increasing number of families struggling to put food on the table or cover essential living expenses.
“The possibility of another rate increase is on the cards and that will push many mortgage borrowers over the edge, and take many other Australians with them.”