RBA keeps rates on hold as Aussies wrestle with cost of living pressures

It was arguably the least surprising interest rate decision the Reserve Bank of Australia (RBA) has made but it came with caveats that borrowers will dread.

A panel of 36 experts all correctly predicted that the official cash rate would be kept at 4.35 per cent at the RBA Board’s meeting that concluded on Tuesday (7 May).

The decision to keep rates on hold for the third time in a row came at a time when the cost of living pressure experienced by Australian households continues to sit in the ‘extreme’ range.

Finder’s Cost of Living Pressure Gauge shows households are nearing the top of their financial limit. Over a third (36 per cent) of homeowners said they struggled to pay their mortgage in April, while for renters the number was even higher at 42 per cent.

The slide feature atop this interactive pressure gauge illustrates how this measure has evolved since May 2019.

Economist Nicholas Gruen of Lateral Economics said the RBA was still wrestling with inflation that has stabilised above the central bank’s preferred 2 to 3 per cent range.

“Right now there’s a tug of war between hoping that we’ve got through, and, with recent inflation data, worrying that we haven’t.

“That puts paid to the scope for rate cuts in the next few months but whether the next move is up or down depends on how that question is answered but recently the likelihood that the next move is down has been taking on water.”

The RBA put it more formally, but borrowers hoping for a rate cut should be alert to the Board’s use of the phrase “some time yet”.

“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high.

“The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.

“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.

“The Board will rely upon the data and the evolving assessment of risks.

“In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.”

The RBA’s inaction has not stopped the banks from changing their rates anyway.

According to Canstar, since January 33 lenders have increased variable rates by an average of 0.17 per cent and 10 lenders have hiked fixed rates by an average of 0.54 per cent. At the same time, almost as many lenders have cut variable rates, with 29 lenders reducing variable rates by an average of 0.27 per cent while 50 lenders have cut fixed rates by an average of 0.33 per cent.

Steve Mickenbecker, Group Executive Financial Services, Canstar, said there are 24 rates below 5.75 per cent.

“The up and down traffic for interest rate moves confirms that we are at or near the turning point in the cycle, with lenders holding varying views on timing and fine-tuning their competitive offerings for the next phase.”

It was two years ago that the RBA commenced its rate hiking cycle that saw rates rise from 0.1 per cent to today’s level.

It’s a timely reminder that interest rates are only one factor that influences housing prices and activity, according to Tim Lawless, Research Director at CoreLogic Asia Pacific

According to CoreLogic data, since interest rates started to rise two years ago, national dwelling values are only up 2.8 per cent. In contrast, the prior two years (April 2020 to April 2022) saw national home values surge 31.7 per cent higher.

“The early phase of rate hikes sent housing values into a short but sharp downturn, with CoreLogic’s national index dropping 7.5 per cent in the space of nine months. 

“However, a shortage of housing stock alongside tight rental conditions, record levels of migration and above average volumes of purchasing activity saw the market move back into an upswing from February last year.

“Since then the national Home Value Index has recovered to new record highs, but also housing conditions have diversified.”

“Although the pace of growth in dwelling values, at last at a macro level, has slowed since the middle of last year, the outlook for values generally remains positive until the supply/demand dynamic rebalances, Mr Lawless said.

Opinions divided on potential interest rate cut

Economics academics were divided on whether the RBA would be in a position to sneak in a rate cut before the end of the year.

Sveta Angelopoulos of RMIT University’s School of Economics, Finance and Marketing said a holding pattern would continue for now.

"Although the annual change continues on a downward trajectory, the increase from the previous quarter suggests that inflationary pressures in the economy are continuing.

“The RBA is likely to continue to hold but the movements in the next couple of quarters will provide a clearer indication if rate cuts may still be possible later this year or will be delayed to 2025."

James Morley from The University of Sydney did not expect a rate cut any time soon but had some good news around a potential rate hike.

“I anticipate they will continue to hold until possibly December if further progress is made on inflation towards target in Q2 and Q3 and labour market tightness eases.

“The upcoming implementation of the Stage 3 tax cuts, which are accounted for in the RBA forecast, basically guarantee that they won't cut in the next few meetings.

“An increase in rates is also unlikely even if headline inflation bounces back up a bit because the RBA will anticipate the effects of past rate increases will continue to soften household spending, especially as even more homeowners come off low fixed-rate mortgages.”

Some hope of a 2024 reprieve was presented by Jeffrey Sheen of Macquarie University.

“Inflation continues to decline, including for services.

“Though the labour market is tight right now, I expect a slow rise in unemployment and weak GDP growth through to October, which would then allow a 25 basis point cut in the cash rate in November.”

The RBA would not have had time to consider the latest retail sales figures, also released Tuesday, but they would have helped ease any urge to raise rates.

Retail sales volumes fell for the fifth time in the past six quarters, this time by 0.4 per cent, as consumers cut back on buying large household items such as furniture and electronic goods, according to the Australian Bureau of Statistics.