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Cup Day rate rise: RBA lifts interest rates to 4.35 per cent

The Reserve Bank of Australia (RBA) has lifted interest rates for the first time in five months, hiking the cash rate 25 basis points to 4.35 per cent, which is a 12-year high.

The Melbourne Cup Day rate rise, which was widely expected by economists, was the RBA’s 13th rate rise since May last year, and comes after RBA Governor Michele Bullock sent repeated warnings that the central bank would lift rates if the inflation outlook worsened.

That’s exactly what happened, with the Consumer Price Index climbing 1.2 per cent in the September quarter and 5.4 per cent annually.

The 1.2 per cent increase in the September quarter was up from 0.8 per cent in the prior quarter.

Ms Bullock said today’s interest rate decision was in direct relation to the altered inflation outlook.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” she said.

“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. 

“While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. 

“CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. 

“The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

Ms Bullock said the Board had received updated inflation information since its August meeting as well as data on the labour market, economic activity and new forecasts.

“The weight of this information suggests that the risk of inflation remaining higher for longer has increased,” she said.

“While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. 

“Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. 

“Conditions in the labour market have eased but they remain tight. 

“Housing prices are continuing to rise across the country.”

Ms Bullock said the Board remained committed to returning inflation to target, but there were still “significant uncertainties” around the outlook.

She said services price inflation overseas had been “surprisingly persistent” and the same could occur in Australia.

“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 when the labour market remains tight,” she said.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. 

“And globally, there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.”

Ms Bullock said whether interest rates would rise further depended on fresh data and an evolving assessment of risk.

“In making its decisions, the Board 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,” she said.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Geoff Lucas – The Agency

The Agency’s Managing Director and CEO Geoff Lucas said as suggested over the past few months, today’s 25 basis point increase was an appropriate and timely response by the RBA. 

He said since September CPI data pointed to uncomfortably high inflation (a very strong 1.2 per cent ahead of the 0.9 per cent expected) pressure had been on the RBA to lift the cash rate from a point of relative neutrality to a more constrictive level.  

“It’s clear that services inflation, including petrol, electricity and rents remain entrenched,” Mr Lucas said.

“As we’ve been mentioning since early 2023, there is a lag on rent price data flowing into the official CPI figures and this will further increase into 2024. 

“Indeed, some elements of services inflation would be even higher if not for government subsidies.” 

Mr Lucas said there was a strong groundswell of consumer demand that had not been subdued by the 12 previous rate rises.

“One of the big components here is the unabated spending of retirees who, in many cases, have little debt, are not impacted by higher rates and are recipients of stronger positive cash flows through higher interest credits,” he said.

“Although not something mortgage holders want to hear, there is conjecture that perhaps one final rate increase is to come, which would still keep us c.1 per cent below our peers in the UK, Canada, US and New Zealand. 

“Relativity to these international peers is important as the further below we are – the weaker the Australian dollar – and therefore increasing inflation through imported goods.”

Mr Lucas said the good news was the end of this tightening cycle was drawing closer, which would provide stability and greater clarity for consumers, including first-home buyers. 

“And for the first time, aspiring buyers are receiving material interest on their savings – incentivising savings, and reducing consumption,” he said.

“At the same time, higher rates are forcing an increased number of investment properties to be sold due to the changing cashflow dynamic. 

“Evidently, investors are beginning to be attracted to the low risk returns of cash and bonds, particularly when returns, in some cases nominally, outweigh that of residential and commercial real estate.”  

Mr Lucas said this “trading places” of investors into first home buyers would create an interesting dynamic, which he expected to accelerate over the coming year. 

“Furthermore, with constrained supply domestically, expect to see ‘beds and sheds’ remain as the preferred real estate sectors. 

“We also expect to see continued strong supply of new listings, less price volatility and a safer transactional environment.

“Although there’ll be pockets of price reductions in coming months, and a reduction in the rate of price increases overall, Australia – due to strong demand and limited supply will remain a strong positive benchmark of global real estate.”  

Manos Findikakis – Agents’Agency

Agents’Agency CEO Manos Findikakis said today’s rate rise was “disappointing” and one that would damage consumer confidence, slow property price growth and likely worsen the rental crisis.

Mr Findikakis said rising rents were one of the contributing factors leading to rising inflation but the government was adding to that stress by allowing increased migration, which result in heightened competition for rental properties.

He said increasing interest rates would only make the situation worse.

“The irony is, by adding more interest rate hikes, guess what landlords have to do?” he asked.

“They have to increase the rent. So it’s going to drive it (inflation).

“In this instance, I think they’ve got it a little bit wrong, because that’s an underlying factor that’s putting so much pressure on everyone.”

Mr Findikakis said at the property market coal face the mood of consumers was changing, and he predicted confidence and property prices would slip as a result of today’s decision.

“I think there’s going to be another slow down,” he said.

“I think with what’s happening overseas as well, and with the prospect of higher petrol prices, and other economic factors, I think it’s going to reduce people’s confidence.”

Ray Ellis – First National

First National Real Estate CEO Ray Ellis said with Australia experiencing its worst housing crisis in decades, banks posting record profits and capital city auction activity down by 40 per cent, he is aligned with the views of Deloitte Access Economist Stephen Smith who believes a rate rise is a mistake. 

Mr Smith stated earlier this week that “Interest rates are not going to be able to address the key sources of inflation, namely rent, electricity and petrol”.

Mr Ellis also recognises that any uncertainty around interest rates negatively impacts buyers and investors decisions to purchase and last week’s auction results are testament to this.

Thomas McGlynn – BresicWhitney

BresicWhitney CEO Thomas McGlynn said today’s cash rate decision was a “fork in the road” for Sydney property.

“While buyers and sellers have been able to contextualise the increase in rates across the last year, and will continue to take a long-term view of property decisions, it will be an obvious setback for the weeks ahead,” he said.

“The ongoing cost of living pressures, global geopolitical events, and localised occurrences have also shifted the focus, from the dominant sense of optimism and stability that we saw throughout winter.

“Overall, we have seen the pendulum swinging at times what feels like quite aggressively in terms of who the market is favouring which has delivered a certain sense of instability across September and October.

“While it is starting to come back to the centre, today’s RBA decision will muddy that further and be another consideration that all participants of Sydney property need to consider.

“Great opportunities do remain in the market, but we mustn’t lose sight of the broader impacts that will shape the weeks and months ahead.”

Mathew Tiller – LJ Hooker

LJ Hooker Head of Research Mathew Tiller said the RBA’s decision would see more homes come to market in early 2024 as stretched mortgage holders look to make use of positive selling conditions.

He tipped property appraisals would increase this month and in December with vendors looking to go to market early in the new year. 

“Buoyant market conditions are providing plenty of incentives for those considering listing to act,” he said.

“The increase in stock will be driven by those looking to upsize or downsize as well as investors looking to de-leverage their portfolios due to rising mortgage serviceability pressures.

“We don’t expect a wave of forced sales but homeowners who have to sell due to financial reasons are going to achieve a better result now than what they would have at the start or middle of the current cycle of interest rate increases. 

“People won’t cash out of the market entirely but given the price increases, there is potentially more equity in their home and therefore they have room to downsize and reduce their mortgage by selling and buying a smaller property.”

Mr Tiller said conditions contrast from a year ago when appraisal numbers rose but homeowners lacked confidence to sell, due to falling prices, resulting in a lacklustre spring market. 

Buyer turnout at auctions and open homes is expected to remain steady, even with higher interest rates, due to strong population growth combined with a tight rental market. 

Employment data, while softening, still remains very positive. 

Mr Tiller said this meant those with a mortgage or looking to upsize should be comfortable serving their debt. 

“There has been a lot of talk about another rate increase, so most homeowners are both financially and mentally prepared for this announcement,” Mr Tiller said. 

“Some buyers may, however, have to delay their purchases or adjust their price budget as they re-evaluate their financing due to higher serviceability requirements and reduced borrowing capacity.”

Peter Vines – Ray White Commercial Western Sydney 

Ray White Commercial Western Sydney Managing Director Peter Vines said today’s rate hike was expected given the recent inflation data but that didn’t make it any easier, particularly with speculation there is likely to be more to come in the new year. 

“We are already seeing increased stock levels of commercial property and land with many borrowers resigned to the fact that rates will not be going down anytime soon with the inflationary pressures coming from everywhere,” he said.

“We are also seeing commercial vendors far more committed to selling, often considering prices far less than what is previously estimated in a measure to reduce their exposure in the market. 

“We anticipate strong levels of stock for the end of the year and more to come in the new year. 

“We still believe that now represents an excellent time for groups to be in the market as there are often deals to be done when stock levels are elevated, fewer buyers in the market and vendors wanting to clear stock before the end of the year.”

Steven King – Colliers Gold Coast

Colliers Gold Coast Director Steven King said today’s interest rate rise was “not ideal” for the property market but necessary as inflation remained stubbornly high.

“Bringing inflation under control will ease household costs so it’s an important measure in the long term that this is the RBA’s primary objective,” he said.

“One sector that will be happy about rising rates are retirees and those looking to downsize from houses into smaller homes, freeing up equity that can boost bank accounts and take advantage of higher bank interest rates.”

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh said the RBA had lifted interest rates to keep “inflation expectations anchored and maintain confidence in returning inflation to the target range within a reasonable timeframe”.

“The PropTrack Home Price Index shows that the home price rebound is firmly established, with prices hitting record highs in many markets in October,” she said.

“National home prices reclaimed 2022’s price falls in their entirety last month, with the upswing continuing in October. 

“Prices nationally climbed 0.36 per cent month-on-month, bringing them up 4.93 per cent so far this year after 10 consecutive months of growth.

“Record levels of net overseas migration, a challenged rental market, limited housing stock and a slowdown in the completion of new builds are offsetting the impacts of substantial rate rises and the slowing economy, with home prices continuing to lift.

“This additional increase in interest rates may slow the current pace of home price growth but is unlikely to deter these gains, with strong population growth, tight rental markets and a housing shortfall fuelling further price rises.”

Graham Cooke – Finder

Head of Consumer Research at Finder Graham Cooke said today’s rate hike was a tough pill to swallow for homeowners.

“Mortgage holders are already on the ropes, the last thing they wanted was another slug from the RBA,” he said.

“Aussie’s with a $590,000 mortgage will now be forking out roughly $1,345 more per month than they were in April last year.

“That’s a huge amount of extra money to be spending on your mortgage, especially when the cost of almost everything else is also going up.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.