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Inflation came sooner than expected, but RBA keeps rates on hold

Inflation has picked up faster than the Reserve Bank of Australia expected, but the board still elected to keep interest rates on hold at a historic low of 0.1 per cent today.

At the bank’s first meeting of the year, the board did elect to stop further bond buying, with its final purchases to be made on 10 February.

In his Monetary Policy Decision statement, Governor Philip Lowe noted ceasing the bond program did not mean interest rates would rise in the short-term.

“The board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target,” he said.

“Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates. 

“As the board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

Dr Lowe drew attention to the fact that the uptick in inflation had arrived more quickly than the bank had anticipated, but he stressed it still remained lower than in many other countries.

“The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains,” he said.

“In underlying terms, inflation is 2.6 per cent.”

The forecast is for inflation to increase in coming quarters to about 3.25 per cent, before dropping to about 2.75 per cent throughout 2023 as supply issues are resolved and consumption normalises.

Dr Lowe said the board was “prepared to be patient” as it monitors how the various factors affecting inflation evolve.

“As the board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” he said.

“While inflation has picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved. 

“Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target.”

The decision to end the bond purchase program comes after a review of other central banks, how Australia’s bond market is performing and the progress made towards full employment and inflation targets.

The unemployment rate dropped to 4.2 per cent in December and the RBA forecasts it will fall below 4 per cent later this year and to about 3.75 per cent at the end of 2023.

“Many other central banks have ended, or will soon end, their bond purchase programs,” Dr Lowe said.

“More importantly, faster-than-expected progress has been made towards the RBA’s goals and further progress is likely. In these circumstances, the board judged that now was the right time to end the bond purchase program. 

“Since the start of the pandemic, the RBA’s balance sheet has more than tripled to around $640 billion, with this expansion providing continuing support to the economy.”

The board will consider the reinvestment of the proceeds of future bond maturities at its meeting in May.

Andrew Cocks, Richardson & Wrench 

Richardson & Wrench Managing Director, Andrew Cocks said the RBA decision to keep rates on hold was completely in line with their frequent commentary on the economy. 

“Although there has been much media speculation about an imminent interest rate hike following a spike in both economic growth and inflation, the RBA has consistently stated that it will only act on sustained movement in ‘actual inflation’ and wage growth,” he said.

“The big issue for the RBA is to unwrap the ‘Covid effect’ from the current jump in inflation. 

“When the impact of the current Covid-induced staff shortages and associated supply chain issues both nationally and internationally washes out, the underlying inflation remains lower than the RBA’s target band. 

“And despite the growing chorus of media commentators, it is this figure that will largely determine any future move by the RBA.”

Mr Cocks said it was interesting to note the current growth level in inflation was expected to be short lived, with the RBA forecasting that inflation would drop in 2023, and wages growth would continue to be slow. 

“The RBA has reinforced that it needs to see the dual levers of both sustainable wages growth and inflation being in their desired bands before they will look to tap the interest rate brake pedal.”

Meanwhile, Mr Cocks said unwinding the impact of Covid still had to fully play out.

“We’ve already seen how unpredictable the recovery process can be with a new Covid variant turning any recovery plans on their head,” he noted. 

“But the trajectory of the recovery continues towards a definite return to more normal life – it’s just going to take a bit longer than was initially hoped.”

Mr Cocks also noted there were significant changes outside of an RBA rate rise that would impact the real estate industry throughout 2022.

“We’re already seeing the repricing of fixed interest loan products, which is a clear sign that money is becoming more expensive, but in historic terms, it is still at very low levels,” he said.

“At least the commentary about the growth in fixed interest products and the likely increase in variable loans has been enough to start to dampen the price spikes that we’ve seen in the last year or so.

“As our society figures out how to operate more ‘normally’ in a post-Covid world, we’ll continue to see some rebalancing of populations with a gradual move back to the cities of those who took the opportunity to make a work-from-home sea or tree change. 

“How quickly and to what extent this happens will have an impact on the demand for property in the cities, and as this really is unknown territory, it’s hard to predict the extent to which this will occur. 

“For the sake of regional areas, it would be great if they are able to retain a good portion of their new residents.”

Mr Cocks went on to note the final major factor that would impact the real estate market was the recommencement of relatively unhindered international travel and migration. 

“Although it will be a very slow start, it is projected that by the end of 2022, international travel will be approaching levels that existed pre-Covid. 

“All of these factors will have an impact on the property market, with the dampening impact of an increasing cost of finance offset by demand increases from both domestic rebalancing and international arrivals. 

“When combined with the Covid-induced slowdown in much of the medium and high-density residential development space, any major increase in demand for metropolitan residential space will offset the impact of interest rate rises.

“It is also likely to result in higher rents in most metropolitan areas, including those commuter belts that have been the hardest hit by the WFH arrangements and the shut down of the student and skilled migrant markets.”

Mr Cocks concluded cash rate increases were coming, it was only a matter of when.

“We can only hope that the right balance can be met to ensure that we see an end to the wild and unsustainable spike in property prices, without creating a cliff for property prices to fall off. 

“A stable re-adjustment will be what we should all be hoping for, so let’s hope the RBA are able to shut out the noise that is building and maintain their longer term focus.”

Geoff Lucas, The Agency

The Agency Managing Director and Chief Executive Officer, Geoff Lucas said he was not surprised that the RBA kept the cash rate stable and he expected this would remain the case for much, if not all, of 2022.

“Whilst not surprised there was no movement by the RBA, the tone of the commentary supports my view that the chances of an increase in official interest rates between May and August, as expected by some in the financial markets, now appears remote,” he said.

“Despite the recent uptick in inflation for the December quarter, large components of that increase are due to supply-side issues such as fuel and building materials rather than demand issues.

“Interest rate increases are used usually to treat demand-driven inflation and it’s too early to tell whether the increase in inflation is sustained. 

“I expect the RBA will be patient in making that assessment, therefore they are unlikely to increase interest rates until very late this year or early 2023.”

Mr Lucas said irrespective of interest rates moving, discussion about the possibility of them rising was a positive for the market.

“It suppresses excessive buyer exuberance,” he said.

Manos Findikakis, Eview Group 

Eview Group Chief Executive Officer Manos Findikakis said while today’s RBA announcement offered no surprises in terms of rate rises, it seemed increasingly likely there might be a rate rise later this year.

Tipping it would most likely occur after the Federal Election, Mr Findikakis said his “gut feeling” was the RBA would hold back until at least August, with Omicron still a factor to consider.

In the meantime, he said there were initial signs the property market was softening slightly as inflation and tighter lending conditions began to impact the sector.

“I truly believe as real estate agents we are at the coalface of what’s happening and there are some trends emerging,” he said.

“While the market was softer in January, it is still a sellers’ market but is swinging back towards greater balance.

“That said, we are nowhere near a buyers’ market.”

With an election on the agenda, Omicron still a factor and a rate rise possible later this year, Mr Findikakis tipped the industry would enjoy a strong February and March, but might soften again in April and May. 

While leaving the cash rate on hold was what many expected from the RBA at its first meeting for 2022, Mr Findikakis said what did prove interesting was their commentary on inflation and wages growth.

Contrary to the RBA’s mention of ‘modest’ wages growth, Mr Findikakis noted in his personal experience and in discussions with other small businesses, there was increasing pressure on wage prices.

He also noted inflation was increasing rapidly in many other countries, and it could be a case of ‘watch this space’ as to whether Australia would follow suit.

Andrew Acton, Explore Property

Explore Property Leader Andrew Acton said while there had been a lot of commentary and speculation about interest rates rising, today’s RBA decision was not a shock.

He said it was inevitable that rates would rise at some point but it was unlikely to be in 2022, and when they did rise, it would be in small increments.

“I think it will be a little way off,” Mr Acton said.

“It’s more industry people or consumers saying the market will change and interest rates are going to go up, but I’ll wait to hear more from the people who actually make the decision.”

Mr Acton also noted that the property market had remained strong into 2022 and his agents on the ground hadn’t reported any change in prices.

“It’s been times like we’ve never seen,” he said.

“It’s just been a wonderful time to be listing property and to be in the market. Our challenge is being able to go with it.”

Paul Ryan, PropTrack Economist

PropTrack Economist Paul Ryan agreed today’s announcement had been widely expected.

“The RBA left the cash rate on hold today, but ended their program of bond buying known as Quantitative Easing,” he said.

“Both of these decisions were widely expected, so there are not likely to be any significant market impacts.

 “Rates for new mortgages have been rising slowly over recent months, which is likely to continue.”

Mr Ryan said attention was now focussed on the RBA’s updated forecasts and guidance for when the cash rate would increase. 

“This will bring bigger increases to borrowing rates for all borrowers,” Mr Ryan said.

“Many are picking that to be later this year, much sooner than the RBA has previously indicated. 

“Labour market and inflation outcomes have outperformed the RBA’s expectations, which have increased the likelihood of cash rate increases this year.

“Low interest rates have induced higher housing prices and mortgages, which may leave many worried about interest rate increases over the next few years. 

“Interest rate increases earlier than the RBA has previously indicated will slow housing price growth further, by increasing repayments and reducing borrowing amounts for prospective buyers.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.