The Reserve Bank of Australia has increased interest rates for the 11th time in 12 months, lifting the cash rate 25 basis points to 3.85 per cent.
The move comes after the RBA kept interest rates on hold at 3.6 per cent in April.
RBA Governor Philip Lowe said inflation had passed its peak but at 7 per cent was still too high.
“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today,” Dr Lowe said.
“The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5 per cent in 2023 and 3 per cent in mid-2025.”
Dr Lowe said good price inflation was slowing, but services price inflation was “very high” and experience overseas pointed to upside risks.
Labour costs are also rising fast and recent data showed the labour market remained tight, with the unemployment rate at a near 50-year low.
Dr Lowe said the Board’s priority remained to return inflation to target, within the 2-3 per cent range.
“High inflation makes life difficult for people and damages the functioning of the economy,” he said.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. Today’s further adjustment in interest rates will help in this regard.”
Dr Lowe said the Board still sought to keep the economy on an even keel, with the central forecast for the economy to continue growing, but at a slower than normal pace.
“Given the expected below-trend growth in the economy, the unemployment rate is forecast to increase gradually to be around 4½ per cent in mid-2025,” he said.
Dr Lowe said a “significant source of uncertainty” continued to be the outlook for household consumption.
“The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending,” he said.
“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.
“There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.”
Dr Lowed said the Board would continue to monitor the global economy, household spending, inflation and the labour market.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.
Geoff Lucas, The Agency
The Agency Group Chief Executive Officer Geoff Lucas said the RBA decision to increase interest rates by 25 basis points was necessary because, despite the recent reductions in the inflation rate, it continues to sit well outside the RBA’s target.
“We have had a second month of very strong housing data and, in particular, a resurgence in Sydney property prices, which I believe has weighed heavily on the RBA board,” he said.
“The pause in interest rate increases last month created dramatically improved sentiment amongst buyers who believe that the current tightening cycle is over or coming to an end.
“This has been exacerbated by decade-low volumes of listings.
“While it may not be a broadly popular decision, it was a vital one for the board to make this month. When you look at “real interest rates”, inflation minus interest rates, we were actually sitting at negative 3 per cent.
“This shows there was still more work for the RBA to do, especially as we are well below the real interest rates of our ‘dollar bloc’ countries including the US, Canada, New Zealand and the UK.”
Mr Lucas said a continued divergence between Australia and its dollar-linked international countries results in downward currency pressure and further risk of ‘imported inflation’.
“In other words, keeping rates relatively low causes greater inflation,” he said.
“Despite being very much the lucky country now and well into the foreseeable future, we are inextricably linked to international economic forces.”
Mr Lucas said another pressure currently affecting property prices and rental affordability is the chronic undersupply of homes.
He said this is largely due to the cost of construction and supply chain issues post Covid, but it has been exacerbated by record immigration.
“At the last budget in October, the forecast for immigration was 235,000 immigrants,” he said.
“At the moment, we are tracking over 400,000 for the 12-month period – that is a 70 per cent variance in just six months.
“While we are obsessed with assessing solutions to address the supply shortage, I think it is time to assess how we can also manage demand.
“While a growing population is economically desirable in the long- term for Australia’s future prosperity and growth, by narrowing the inflow to specific beneficial skills of immigrants, we can both alleviate the excess demand as well as adding much-needed skills to our workforce and population.”
Mr Lucas said while high levels of skilled immigrants were beneficial, Australia currently lacked the infrastructure and housing to accommodate record-level intakes.
“Perhaps a two-year limit of 250,000 (reducing demand by 150,000 per annum) would achieve both, whilst we use the two-year hiatus to address supply,” he said.
Mr Lucas said while today’s interest rate rise might be unpopular, it was necessary and would hopefully deflate any “irrational exuberance”.
“The RBA is correct in keeping its foot firmly on the throat of a slowly reducing inflation rate,” he said.
“Consumers should not lose sight of the fact that we are either at or very close to the end of this tightening cycle, and an environment of less volatility in home prices.”
Manos Findikakis, Agents’Agency
Agents’Agency Chief Executive Officer Manos Findikakis said some confidence had returned to the property market in the past two months and he didn’t expect today’s rate rise to significantly alter that sentiment.
“If we look at our sales from March and April, they’ve been very strong months,” he said.
“Not as strong as in 2021, but having said that, the confidence and the volume of people coming to open for inspections has increased.
“I have a gut feeling that it’s not going to decrease or impact the current energy in the market.”
Mr Findikakis said those people active in the market would have anticipated further interest rate hikes and prepared accordingly.
He said many vendors and buyers active in the current market last transacted when interest rates were six and seven per cent.
“They’re past buyers and past sellers who have experienced high interest rates, so they’re not fearful of the interest rate hikes,” Mr Findikakis said.
Mr Findikakis said he didn’t expect today’s cash rate announcement to have a negative effect on property prices either.
“I think we’ve bottomed out from a price point of view and we still haven’t seen distressed sales,” he said.
Thomas McGlynn, BresicWhitney
BresicWhitney CEO Thomas McGlynn said today’s 0.25 per cent cash rate rise was “a reassertion of the current economic uncertainty, and that of the RBA’s actions”.
“The slight decrease in inflation to 7 per cent for the March quarter reflects the impact of these measures and supports many Australians’ acceptance that the current cycle has passed its peak,” he said.
Mr McGlynn said buyers and sellers were no longer solely focussed on interest rates and they were now viewing the market and its key influences with a broader lens.
“This follows a strong April, which saw multiple financial institutions revise their annual house price forecasts,” he said.
“It’s possible that we may see 5-6 per cent price growth for the calendar year. May and June will further cement this shift in perspective.”
Mr McGlynn said next week’s Federal Government Budget would inevitably influence sentiment as well, particularly on how the nation looks to address complex housing and cost-of-living challenges.
“Coming months will also see NSW first-home buyers transition from the former Liberal Government’s stimulus to that of Labor’s incentives,” he said.
“This will serve as a quasi-test of the level of influence of such measures on demand in that sector.
The considerations for participants in Sydney property are multi-layered; more nuanced than whether rates will hold or increase.
“On balance, this is a positive as it reflects their understanding of the myriad influences on property, and how best to act on their needs in a market where some level of uncertainty will remain for the foreseeable future.”
Andrew Cocks, Richardson & Wrench
Richardson & Wrench Managing Director Andrew Cocks said it was not too surprising that the RBA lifted the cash rate today.
“Although the trajectory of the underlying inflation rate has started to respond to the previous 10 rate increases, the current inflation figure is still more than double the top of the RBA’s target range and with strong employment, increasing wages (particularly in the public sector), significant migration numbers and consumer spending still too high, the RBA has obviously assessed that more needs to be done to bring about the significant change in inflation that it’s looking for,” he said.
“Due to the significant time lag of the impact of interest rate increases on the economy, it’s almost certain that the RBA will overshoot and we’ll be seeing interest rates declining again within the next 12 months to deliver an energy shot to an economy that has been hammered into submission.”
Mr Cocks said an “interesting dynamic” was occurring in the property market now, with real drivers, such as supply and demand, having a greater impact than the cost of finance.
“The significant total migration increases that have been experienced since Australia belatedly threw open its borders and begged people to like us again, along with the large Covid-induced reduction in average household size, has seen the available national pool of residential accommodation put under significant pressure,” he said.
“This has resulted in the historically low rental vacancies that we are currently seeing and has also put a floor under the residential sales market that was again not anticipated by the banks and economic forecasters.”
Mr Cocks said the supply equation would not change any time soon, with the residential new-build sector forecast to deliver stock well below demand for many years to come.
He said this would ensure the predicted crash in property prices would not occur.
“Once the national property markets get a good sense that the lending environment is more predictable, it’s likely that many of the potential vendors who have been sitting on their hands waiting for the doom and gloom to end will start to think more seriously about their next move,” Mr Cocks said.
“Given the significant underutilisation of many Australian houses, increasing the liquidity of the residential property market would go a long way to improving some of the pressures in the housing market that we’re currently experiencing.”
Nerida Conisbee, Ray White Group
Ray White Chief Economist Nerida Conisbee said today’s interest rate hike was “market defying” but it was likely to be the last one for a while.
“Although inflation is coming back, it is likely that it isn’t moving quick enough for the Reserve Bank of Australia (RBA),” she said.
“It is, however, likely to be the last increase for a while.
“Last week, inflation came in at seven per cent. Although still well above the RBA’s target of 2-3 per cent, it is moving in the right direction.
“Inflation appears to have peaked in December and it is likely that the trajectory is now downwards.”
Ms Conisbee said there were still some elements keeping inflation high, including the cost of building a new home being 12.7 per cent higher over the year and domestic travel rising 25 per cent.
“More recently, medical costs have risen over the quarter, a once-off that appears to be driven by the Medicare Safety Net January reset, as well as specialists reviewing their fees at the start of the year,” she said.
“More positively, international travel costs have come back and many retailers, particularly those selling home goods, are discounting to get rid of excess stock.
“This cycle, there are many items that higher interest rates can’t control, but for those driven by consumer demand, it is certainly working as expected. We are buying less furniture, clothes and our international travel plans have been delayed.”
Ms Conisbee said it was likely rates would now go on hold “for some time”.
“Interest rate increases don’t work immediately and it will take some time for the last 11 interest rate increases to flow through to inflation,” she said.
“Given the slowdown in economic growth, it is likely that the next movement in rates will be downward, but we may be waiting a bit longer for that to occur.”
Mathew Tiller, LJ Hooker Group
LJ Hooker Head of Research Mathew Tiller said the RBA lifting rates would not top momentum in the property market.
He said the market would have its traditional winter slowdown, but there were still a lot of strong drivers in the market.
He said ongoing high inflation combined with very strong employment markets prompted the increase following last month’s pause on rate increases.
“We have seen a pick-up in the number of attendees at open homes and we expect this will continue, although it is likely buyers’ activity will be more cautious until the RBA holds for a couple of consecutive months,” he said.
“There is still a lot of positivity in the property market reflected by national house price growth and high auction clearance rates during the past two months.”
Mr Tiller said new property listings were still well below the five-year average, underpinning competition among buyers.
Auction clearance rates are around 70 per cent leaning in favour of sellers.
Mr Tiller said the cash rate increase could encourage homeowners to sell who want to capture the market momentum.
Winter is typically a quieter time for property listing and sellers may choose to take advantage of this to maximise their exposure in the market.
“We are expecting to see more sales activity and listings in the second half of the year than what we have seen over the past 12 months, this is because as soon as the message starts to get out there that we have passed the bottom of the market, people will take action,” he said.
“There are homeowners who have been waiting for the market to strengthen and will be feeling more confident due to seller metrics such as high auction clearance levels, number of attendees at open homes and price growth.
“New housing supply remains low at a time when we have very strong population growth, internal migration and increasing investor interest, so there is a lot of demand driving the market over the short term.”
Tim Lawless, CoreLogic
CoreLogic Research Director Tim Lawless said today’s interest rate decision was always going to be a line ball; however, the 25 basis point lift is likely to be the last in what has been the most rapid rate hiking cycle on record.
“Although inflation has been trending lower since peaking in the December quarter 2022, today’s rate hike reflects the RBA’s uncertainty about how ‘sticky’ inflation might be amid persistently tight labour markets and new evidence that housing prices have moved through their low point,” he said.
“Although the RBA didn’t touch on the recent more positive housing trend, the statement following the meeting highlighted the rapid drop in housing prices since rate hikes commenced could be a factor in slowing household spending (alongside high interest rates and high cost of living pressures).”
Mr Lawless said the CoreLogic data released Monday showed a second consecutive monthly rise in national housing values, with each of the four largest capitals recording a lift in values over the rolling quarter.
“Arguably, the more positive trend in housing conditions supported the RBA’s decision to lift rates today,” he said.
“Although housing considerations aren’t part of the RBA’s mandate, a return to a more positive housing trend could be accompanied by a lift in consumer attitudes, supporting consumption and potentially keeping inflation higher for longer.
“The lift in interest rates could act to dampen some of the recent housing exuberance, although a range of other factors are likely to support the continued stabilisation in home values, including low available supply, extremely tight rental conditions and higher demand via net overseas migration.
“Time will tell whether the latest rate hike is enough to send the recent positive trend in home values into reverse, however our anticipation is the market will continue to level out on the expectation that interest rates have peaked and the imbalance between housing demand and supply will persist for some time yet.”
Mr Lawless said today’s interest rate announcement also marked the one-year anniversary of the rate hiking cycle on record.
“Looking back on the housing sector amid such a rapid rate hiking cycle, it’s unsurprising to see the rate of decline in home value was also the fastest on record,” he said.
“The rate hikes coincided with record levels of household indebtedness, sending capital city home values 9.7 per cent lower over 10 months.
“Although interest rates remain high, we have recently seen the trend in housing values stabilise, if not show a level of growth in some regions.
“The more positive trend is a stark reminder that the performance of housing is influenced by a broad range of factors that go well beyond interest rate settings.
“Similar to housing conditions in the mid-2000s, housing values have turned positive without the support of lower interest rates, a loosening in credit policies or fiscal support.
“It seems the combination of low supply and high demand has been enough to offset the downside factors of higher rates and a relatively tight credit environment.”
Eleanor Creagh, PropTrack
PropTrack Senior Economist Eleanor Creagh said the cash rate now sitting at 3.85 per cent meant maximum borrowing capacities would have dropped about 30 per cent.
But she said this wouldn’t necessarily equate to a fall in property prices.
“While the significant reduction in borrowing capacities and deterioration in affordability caused by interest rate rises implies larger price falls, the downwards pressure is being offset,” she said.
“The impact of interest rate rises is being counterbalanced by stronger housing demand and tight supply conditions.
“The path for home prices in the months ahead will be influenced by many opposing factors, including the level of supply hitting the market and the trajectory of interest rates.
“Headwinds remain, with the full impact of rate rises already delivered yet to be felt and the possibility of further tightening still in play.
“But even as interest rates continued to rise this month, the end is in sight. It is likely the bottoming process will continue, with the bounce in home prices firming and values stabilising as uncertainty eases.”
Ms Creagh said a home shortage exacerbated by high construction costs and industry challenges would also underpin values as the population grows.
“Positive demand drivers stemming from the shortages in rental supply and rebound in international migration also remain, alongside ongoing tightness in the labour market, which is promoting a sense of job security,” she said.
“A slow increase in wages growth will also maintain housing demand against a backdrop of tight supply.”