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Interest rates on hold but future hikes not ruled out

The Reserve Bank of Australia (RBA) has kept interest rates on hold at 4.35 per cent at its May meeting, but cautioned that higher than expected inflation was not expected to return to the target 2-3 per cent range until the second half of 2025.

In her monetary policy statement after today’s RBA Board meeting, Governor Michele Bullock, also said the midpoint of the target inflation range would not be met until 2026. 

“The economic outlook remains uncertain and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth,” she said.

“In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year. Inflation is, however, expected to decline over 2025 and 2026.”

Ms Bullock said inflation continued to moderate, but had declined more slowly than expected, with CPI growing 3.6 per cent in the year to the March quarter. 

Underlying inflation was higher than headline inflation and declined by less. 

“This was due in large part to services inflation, which remains high and is moderating only gradually,” Ms Bullock said.

“Higher interest rates have been working to bring aggregate demand and supply somewhat closer towards balance. 

“But the data indicate continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs.”

Ms Bullock noted that conditions in the labour market had eased over the past year, but still remained tighter than what is consistent with sustained full employment and inflation at target. 

“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” she said.

“Meanwhile, inflation is still weighing on people’s real incomes and output growth has been subdued, reflecting weak household consumption growth.”

The Board noted that the economic outlook remained “highly uncertain”, especially when it comes to the persistence of services inflation.

“It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate. 

“Growth in unit labour costs also remains very high. 

“It has begun to moderate slightly as measured productivity growth picked up in the second half of last year. 

“This trend needs to be sustained over time if inflation is to continue to decline.”

Ms Bullock also noted household consumption growth had been particularly weak as high inflation and earlier rises in interest rates had affected disposable income. 

“More broadly, 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 the labour market remains tight,” she said. 

She said returning inflation to target remained the Board’s “highest priority” and refused to rule out future interest rate hikes.

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

“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 that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”

Geoff Lucas – The Agency

The Agency Managing Director and CEO Geoff Lucas.

The Agency Managing Director and Group Chief Executive Officer, Geoff Lucas, said today’s cash rate hold was largely expected, but the outlook for interest rate cuts later this year had faded.

“What’s clear is there is increasing and widespread recognition that services inflation is proving harder to move than originally anticipated in Australia and many of our trading partner economies,” he said. 

“The most recent CPI has underpinned this, and the upcoming July tax cuts will add to inflationary pressures. 

“As a result we are seeing more economic forecasts for interest rates to remain at higher levels for longer, which is in direct contrast to much of the media hype around late last year and early this year that Australia would be looking at several interest rate cuts during 2024.

“It‘s now becoming increasingly clear that not only has the likelihood of cuts in 2024 diminished – but the possibility of an increase later this year is starting to grow.”

Mr Lucas said upcoming interest rate changes would depend on future data and the RBA balancing a merger of several factors.

“Seldom before has there been such a confluence of dynamics including cost of living increases, a housing affordability and supply crisis, record low unemployment, unprecedented rate of interest rate increases, as well as geopolitical instability,” he said.

“We’re at or near the end of an aggressive tightening cycle, and despite the number of variables we are entering a period of far greater interest rate stability.”

Mr Lucas said buyers were acting with more certainty, while vendors were also feeling more comfortable to transact.

“This is because they feel the market as a whole is not going to undergo the same level of price volatility as we’ve seen in recent periods and both buyers and sellers have more certainty around price.  

“As a result we’re seeing an uplift in listings nationally, with the latest CoreLogic data showing a 23 per cent increase in the rolling four-week listings numbers compared to the previous corresponding period. 

“We expect this increase in supply will continue throughout autumn and into a strong winter of activity across the country.”

Mr Lucus said demand and supply would continue to be the key driver behind property prices. 

“Although on a national basis, price volatility will likely continue to fall, we are seeing significant variability in price movements across different markets, with Perth, Adelaide and Brisbane, annualised 24 per cent, 13.6 per cent and 13.2 per cent growth respectively, due to low supply and strong demand,” he said.

“These three cities are far outperforming the national annualised growth of 7.2 per cent.

“Melbourne, with zero growth in the last quarter, underperforms all national capital cities and is beginning to present opportunities as it progresses to surpass Sydney as the most populous Australian city by 2031.”

David Edwards – First National Real Estate

First National Real Estate CEO David Edwards.

First National Real Estate Chief Executive Officer, David Edwards, said today’s interest rate hold kept the great Australian dream of home ownership alive for many.

“Recognising that many economists are predicting the potential for further rate increases later this year in order to balance and reduce rising inflation costs, today’s announcement to hold interest rates will be welcomed by those looking to invest in the housing market,” Mr Edwards said.

“Any reprieve in rising interest rates and also government schemes that assist first home buyers like the Help to Buy program is critical to ensuring Australians never lose hope in owning their own home and what is known as ‘the great Australian dream’.”

Nerida Conisbee – Ray White Group

Ray White Chief Economist Nerida Conisbee.

Ray White Group Chief Economist, Nerida Conisbee, said the March inflation figures had changed the interest rate outlook dramatically.

“Whereas on the morning of April 24, markets were pricing in a cut for October 2024, in just 24 hours, this timing had changed to April 2025,” she said.

“Looking at data at this exact point in time suggests no cut in 2024. 

However, as we consistently see, the outlook can change dramatically depending on what data is released.” 

Ms Conisbee said the next major data release that could change the outlook significantly were the economic growth figures to be released in June. 

“If we see a decline in GDP, it may be enough to push the RBA to move more quickly, perhaps even cutting rates while inflation remains above three per cent,” she said.

Globally, Ms Conisbee said the outlook for rate cuts remained variable.

“The European Central Bank is still on track for a June cut,” she said.

“The UK is now in recession, however, high inflation has now pushed out timing for a cut to the third quarter. 

“In the US, a similar time frame is in place and there is now a minimal chance that rates will be cut three times this year as forecast in early 2024.”

Mathew Tiller – LJ Hooker

LJ Hooker Group’s Head of Research Mathew Tiller.

LJ Hooker Group’s Head of Research, Mathew Tiller, said the RBA’s decision to keep rates unchanged would benefit both sellers and buyers in the lead-up to the winter market.

He said an overall demand/supply imbalance in most capital cities and regional markets was likely to see price growth continue in the months ahead, with demand remaining steady, particularly in the more affordable end of the market.

“We are likely at the peak of the interest rate cycle, at 4.35 per cent, despite the latest inflation data being higher than anticipated and expect the cash rate to remain stable throughout winter with a cut towards the end of the year or early in 2025,” Mr Tiller said.

“Sellers can be confident they will achieve a good sale price because there is this demand in the market and the continuing price growth is evident of the ongoing supply-demand imbalance.

“While there are not as many homes to choose from for buyers, there is a high probability that there is unlikely to be further rate increases which can allow them to budget better and act with more certainty when looking to make their purchase.”

Mr Tiller said listings remained tight in Perth, Adelaide, Brisbane, and Sydney, which have recorded the highest price growth in recent months. 

Melbourne has seen lower price growth due to an influx of new listings hitting the market over recent months. 

“While we have seen the number of appraisals continue to rise, we don’t expect a big rush of listings coming to the market to dampen any price growth over the winter months,” Mr Tiller said.

Activity is expected to remain buoyant in the more affordable end of the market with first- home buyers and investors attracted by strong yields and low rental vacancy rates.

“The middle market is more susceptible to mortgages with more owner-occupiers and families, so while there is price growth, it is not as strong as the lower end where investors and first home buyers remain highly active,” Mr Tiller said.

Eleanor Creagh – PropTrack

PropTrack Senior Economist Eleanor Creagh.

PropTrack Senior Economist, Eleanor Creagh, attributed today’s decision to keep rates on hold to falling retail sales and low consumer sentiment. 

“Although inflation has not fallen as quickly as expected early in the year, retail sales and consumption are weak, and consumer sentiment remains low,” she said.

“Despite higher-than-expected inflation in the March quarter confirming the challenging journey towards lower inflation, the RBA Board remains forward looking, anticipating further decline in inflation by the end of the year.”

Ms Creagh said the PropTrack Home Price Index showed national home prices had hit a fresh record in April, though the pace of monthly growth has slowed since March in every capital city, except Darwin.

“Home prices rose quickly in early 2024, with affordability constraints overpowered by an imbalance between supply and demand,” she said.

“However, it is reasonable to expect a slowing from here as we move into a seasonally quieter period for property markets, especially with interest rate cut expectations pushed back.

“Property prices are expected to lift further this year, with housing demand buoyed by population growth, tight rental markets, resilient labour market conditions and home equity gains supporting upgrade activity. 

“Further, falling inflation and tax cuts on July 1 will support real incomes and household spending over the second half of this year.

“Meanwhile, the supply side of the housing market has fallen short in responding to substantial demand. Building activity is at decade-low levels, exacerbating the housing supply shortage.

“This imbalance between supply and demand has offset the higher interest rate environment and deterioration in affordability and is expected to continue to do so, fuelling further price rises.”

Ms Creagh said even though inflation in the March quarter had pushed back the expected timing of rate cuts, most experts still tipped the next move will be a drop.

“However, the timing remains uncertain,” she said.

“As a result, prices are expected to lift further in the months ahead, though it’s likely the pace of growth will continue slowing as the seasonally quieter winter period approaches, particularly in tandem with rate cut expectations being pushed further out.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.