RBA resists urge to gamble on a Melbourne Cup Day rate cut

The Reserve Bank of Australia (RBA) has kept interest rates on hold, with the Melbourne Cup day announcement marking exactly 12 months since the last rate movement took the official cash rate to 4.35 per cent.

The decision on Tuesday (5 November) came as little surprise to most observers, despite lower inflation sparking hopes among some borrowers that rates would be cut.

With rates being kept at their relatively high level for at least the 10 December RBA Board meeting, many prospective property buyers are adopting a wait and see approach.

Research from Mozo revealed that 39 per cent of respondents said they’re waiting for rates to drop before purchasing a property.

Within this group, 16 per cent are holding out specifically for a more affordable home loan, while 5 per cent are hoping that lower rates might ease property prices.

Additionally, 11 per cent expressed caution about locking in a mortgage at the current high rates, and 6 per cent are anticipating better financial conditions with rate cuts.

API Magazine’s Property Sentiment Report Q3 2024, released on Tuesday (see page 11) also found a heightened sense among survey respondents that high interest rates were influencing property prices.

In its latest Statement on Monetary Policy, the RBA said headline inflation has fallen, but underlying inflation is still too high.

“The cash rate will stay restrictive until the Board is confident that inflation is moving sustainably to the middle of our 2–3 per cent target range,” the policy statement noted.

The RBA expects inflation to reach 2.5 per cent by late 2026, meaning interest rates could remain stubbornly unmoved for some time yet.

“Underlying inflation is expected to ease slowly as demand in the economy moves back into line with supply,” the RBA noted.

“While headline inflation is expected to be in the target range in the first half of next year, part of this is due to temporary cost-of-living relief.

“The outlook is highly uncertain.

“On the one hand, if conditions in the labour market are stronger than expected and productivity growth remains weak, this could slow progress in bringing inflation to target.

“On the other hand, household spending might not increase as quickly as expected, which could mean that inflation returns to target faster (while) heightened geopolitical risks and potential changes to trade and fiscal policies abroad add to this uncertainty.”

Graham Cooke, head of consumer research at Finder, said pressure was mounting for a rate cut in February next year.

“Even though inflation has hit the RBA’s target window of 2-3 per cent, this doesn’t trigger the RBA to automatically start cutting rates – which will disappoint homeowners.

“With a record high 47 per cent of borrowers struggling to make their repayments in October, thousands will be forced to cut back on spending in other areas. 

“Many are depending on the multiple rate cuts predicted to come in 2025,” Cooke said.

Academics Aarti Singh, Associate Professor, School of Economics, University of Sydney, and Tomasz Wozniak, Senior Lecturer, University of Melbourne, said those waiting for an interest rate cut may have to bide their time.

“The good news is that the latest CPI number is within the RBA’s band,” Mr Singh said.

“Moreover, this decline was expected by the market, however, since other measures of CPI that exclude the more volatile items are still outside the band, RBA may wait before lowering rates.”

Mr Wozniak was even more forthright.

“We’re not moving anywhere for now,” he said.

“The forecasts from all my models indicate slight downward pressure for the coming months.

“I interpret these predictions as a clear expectation of cuts in the cash rate but at an uncertain horizon.

“Forecasting the breakpoint is always tricky, and the upcoming data announcements will play a decisive role in shaping the forecasted trajectories in the following months.”

Strong jobs outlook could stall a rate cut

Tim Lawless, Research Director at CoreLogic Asia Pacific, said the data simply hasn’t been compelling enough to bring rates down just yet.

“At the very least, the decision to hold interest rates at 4.35 per cent should provide a further boost to household confidence, along with clear signs that inflation is moving in the right direction and the next move is likely to be down, albeit with some uncertainty around the timing of cuts.

“A further rise in sentiment is a positive for housing, but we aren’t likely to see stronger housing outcomes until borrowing capacities improve and barriers to mortgage serviceability assessments are reduced.”

While strong labour markets are a good thing for Australians, with only 4.1 per cent of the labour force being unemployed, the RBA is looking for labour markets to loosen. A rise in unemployment implies less upward pressure on wages which would support inflation moving sustainably within the target range.

The RBA has forecast the unemployment rate to reach 4.3 per cent by December before rising to 4.4 per cent by mid-next year. Similar to the path of inflation, the trajectory is heading in the right direction, with unemployment rising from a low of 3.5 per cent in mid-2023, briefly reaching 4.2 per cent in July before slipping back to 4.1 per cent in August and September.

“Households are weathering the storm of high interest rates and high cost of living pressures by pulling back hard on their discretionary spending, which can be seen in relatively weak retail spending outcomes,” Mr Lawless said.

“Also, household savings accrued through the pandemic have largely been drawn down.

“The combination of high interest rates, cost of living pressure and less savings has seen mortgage arrears return to around pre-pandemic levels.

“It’s clear the flow of economic data will be central to understanding where the cash rates moves from here.

“Almost certainly, the next move is down, but the timing of a rate cut remains uncertain,” he said.

Globally, the indicators are also positive.

Inflation in advanced economies has continued to ease broadly as expected, or in some cases a little quicker, giving central banks confidence that it is returning sustainably to their targets.

The RBA’s Tuesday statement noted that while it remains above rates consistent with central banks’ targets in most peer economies – with Australia sitting at the upper end of the range – many central banks have communicated greater confidence that inflation is returning sustainably to their targets.

“That confidence reflects further progress on disinflation, a slackening in labour markets and in some cases weaker-than-expected recent activity – all of which is consistent with the restrictive stance of monetary policy in most advanced economies.

“With upside inflation risks seen to be receding, some central banks have become more attentive to downside risks to activity, labour markets and, in some cases, inflation,” the RBA noted.