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RBA hits pause on interest rates for now

After 10 straight rises the Reserve Bank of Australia has today elected to keep interest rates on hold, pausing the cash rate at 3.6 per cent.

The decision follows a cumulative increase in interest rates of 3.5 per cent since May last year, with Reserve Bank Governor Philip Lowe noting that the full impact of the successive hikes had not fully flowed into the economy yet.

“The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt,” Dr Lowe said.

“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook.”

But Dr Lowe hinted that more rate rises could be on the cards in the coming months, highlighting that it was still the central bank’s aim to return inflation to the 2-3 per cent range.

“The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” he said. 

“The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty. 

“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. 

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

But the good news is that inflation appears to have peaked, with the rate pause coming after inflation dropped to 6.8 per cent in February, down from January’s 7.4 per cent and the December peak of 8.4 per cent.

“A range of information, including the monthly CPI indicator, suggests that inflation has peaked in Australia,” Dr Lowe said.

“Goods price inflation is expected to moderate over the months ahead due to global developments and softer demand in Australia. 

“Meanwhile, rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country. The prices of utilities are also rising quickly. 

“The central forecast is for inflation to decline this year and next, to around 3 per cent in mid-2025.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”

Dr Lowe said growth in the Australian economy had slowed and was expected to remain “below trend” in the next few years, with higher interest rates, cost-of-living expenses and a drop in housing prices leading to a “substantial slowing” in household spending.

“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances,” he said.

“The labour market remains very tight. The unemployment rate is at a near 50-year low and underemployment is also low. 

“Many firms continue to experience difficulty hiring workers, although some report an easing in labour shortages and the number of vacancies has declined a little. 

“As economic growth slows, unemployment is expected to increase.”

Wages growth continues to increase in response to the tight labour market, but the Board remains alert for any risk of a prices-wages spiral, Dr Lowe said.

On the issue of global banking turmoil in the US and Switzerland, Dr Lowe said the outlook for the global economy remained subdued, with below average growth expected this year and in 2024.

He said the banking issues had caused volatility in financial markets and a reassessment of the outlook for world interest rates.

“These problems are also expected to lead to tighter financial conditions, which would be an additional headwind for the global economy,” Dr Lowe said.

“The Australian banking system is strong, well capitalised and highly liquid. It is well placed to provide the credit that the economy needs.”

Geoff Lucas, The Agency

The Agency Group CEO Geoff Lucas said the decision to hold interest rates steady at 3.6 per cent was broadly expected by financial markets, however he had expected at least one more rise in this cycle.  

“I am concerned that the RBA’s inaction will give some consumers false hopes,” he said.

“The RBA is trying to give consumers some relief, however the reality is unemployment at 3.5 per cent remains near a 50-year low and the economy is still showing signs of strength, and it may have been prudent to deliver one more rise in this cycle.”

Mr Lucas said the decision was good news in the immediate term for variable rate mortgage holders who had come under increasing pressure over the past 10 months. 

He said expected further sentiment improvement in coming weeks as borrowers were likely to feel as though the current tightening cycle was coming to an end.

“It also brings forward an improved transactional environment where vendors will see higher levels of demand and a likely increase therefore in sales volume,” Mr Lucas said.

“However, it could be premature, while it could be argued that inflation fell from 7.4 per cent to 6.8 per cent it still has a long way to go to be within the RBA target range.

“Although we have seen evidence of reductions in retail spending, yesterday’s OPEC decision in reducing oil output means we can expect further inflationary pressure from the increase in fuel prices.” 

Mr Lucas said recent CoreLogic data also highlighted positive consumer sentiment translating into property price hikes of 1.4 per cent in Sydney and 0.6 per cent across Australia respectively.

“Recent home price rises, especially in Sydney and Melbourne, also reflect improving sentiment, although this has been assisted by some of the lowest sales activity in these cities over the past 28 years,” he said.

“Sales in NSW are 22.7 per cent down on the first three months of the year compared to last year with Victoria down 28.6 per cent for the same period. 

“This data is symptomatic of consumers thinking that things are better than what they are. 

“In fact, low stock volumes and record immigration played a contributing roles in the increase in property prices. This month was an opportunity for the RBA to further dent the persistent inflationary risk that now remains.

“We remain cautious, as there are many factors that suggest inflation is stickier than some of the wishful thinking suggests, and whilst there is an expectation of interest rate cuts into 2024, it is possible the next move may be upward if inflation proves more resilient than many would hope. 

“What however appears certain is that we are now entering a period of reduced volatility in interest rate moves and as a result a more stable and safer transactional real estate market.” 

Thomas McGlynn, BresicWhitney

BresicWhitney CEO Thomas McGlynn said the RBA’s decision to hold the cash rate steady today was a sign of many things, not least its intended re-assessment of economic conditions. 

“The decision to hold could be viewed as a broader reflection of the impact that the past 10 consecutive rate rises did have, and will continue to have, for many current and aspiring mortgage holders,” he said. 

“At the same time, this pause could be the catalyst for the continuation of positive momentum across Sydney and reflect that we may be near the back end of this latest cycle.

“Buyers and sellers have proved their resilience – adapting and adjusting as each month’s rise was delivered, as they have to other State Government initiatives. 

“Pleasingly, the data from March supports this and it’s really clear we are no longer just talking about green shoots of momentum. 

“Across the industry we’re achieving results that simply would not have been feasible six months ago, across many price categories.”

Mr McGlynn said demand was strong and BresicWhitney data showed open home numbers had improved significantly, while clearance rates were also rising.

“Properties listed off-market are also performing well, showing there’s pent-up demand among underbidders and buyers who are willing to transact in this manner,” he said.

“CoreLogic’s confirmation that Sydney led the charge with respect to price gains for the month is validation of the current market, too. 

“All in all, it’s likely that this positivity will continue, just as a certain level of uncertainty will. 

“The two are not mutually exclusive and that’s something that we now know to be true.”

Dan Argent, UrbanX

UrbanX Chief Energy Officer Dan Argent said “brakes on rates is an accelerator for agents”. 

“With inflation showing signs of cooling, the RBA is likely to adopt a wait & see approach for the foreseeable future, and that’s good news for borrowers, and even better news for agents, who have experienced one of the fastest slowdowns in the market since the GFC,” he said.

“Agents should now be looking ahead to a rebound in sales activity and setting themselves up for the next boom, which is bound to come once investors inevitably re-enter the market.”

Nerida Conisbee, Ray White

Ray White Chief Economist Nerida Conisbee said she wasn’t surprised the RBA kept interest rates on hold today, given the recent drop in inflation. 

“If this continues to come down over the coming months, it is likely that we are now at peak interest rates and the next change will be cut,” she said.

Ms Conisbee said housing remained the main driver of inflation, particularly construction costs, but the rate of increase had slowed, particularly as rises in the cost of building materials had eased.

“Rents, however, continue their rapid rise and are unlikely to ease anytime soon given a widespread shortage of homes,” she said.

“Other cost increases which have eased include food and automotive fuel.”

Ms Conisbee said it was unlikely Australian banks would experience a similar fate as Silicon Valley Bank in the US, but she said the RBA still needed to “move carefully” as Australia was not immune to a shaky global financial situation. 

“Silicon Valley Bank’s collapse came about because they were betting on interest rates to remain ultra low for a long time and were holding a lot of long term bonds,”

“Interest rate increases meant the value of the bonds collapsed and a bank run resulted. 

“Credit Suisse’s problems have been a long time coming and problems in US banks exacerbated negative sentiment towards them. 

“In Australia, our banks hold a very low proportion of tradable securities and also have significant liquidity should a bank run begin.”

On the subject of property prices, Ms Conisbee said they started rising in December and this climb was likely to continue for the remainder of the year.

Eleanor Creagh, PropTrack

PropTrack Senior Economist Eleanor Creagh said the RBA had decided to hold the cash rate steady to assess the impact of its economic tightening policy

“With the Reserve Bank operating under the ‘policy of least regret’ and given that the full effect of the higher interest rates is yet to be felt, the RBA has paused to allow more time to better assess how economic conditions unfold,” she said.

“The monthly inflation indicator fell to 6.8 per cent in February, down from 7.4 per cent year-on-year in January. 

“This provided evidence the December quarter brought the peak in inflation and that inflation is moving back toward the RBA’s 2-3 per cent target range.

“There’s also evidence that the substantial tightening already pushed through is weighing on households. Further, it takes time for higher interest rates to fully impact household cash flows. 

“In this tightening cycle, with so many borrowers having taken advantage of record low fixed rate mortgages throughout Covid yet to feel the full impact of rate rises, this is especially the case. 

“Many of these borrowers face large increases in mortgage payments as their fixed-rate terms expire in the coming months. As such, it is expected that consumer spending will slow sharply as the full impact of higher interest rates catches up.

“With consumer spending set to slow further and economic activity set to weaken in the coming months, the Board decided it was appropriate to keep the cash rate on hold, giving them time to assess the impact of rate rises already delivered on households, businesses, and economic conditions.”

But Ms Creagh said the RBA had left headroom to increase the cash rate in May, if required.

“The substantial tightening that has been pushed through to date saw conditions in the housing market rebalance quickly last year, with prices falling from peak levels in most parts of the country,” she said.

“Prices nationally fell for nine consecutive months but have now reversed their falling trend. Price falls eased into the end of last year and prices are now moving higher as the limited supply of properties for sale underpins home prices.

“National home prices continued to stabilise in March and moved higher by a small 0.13 per cent, bringing the cumulative bounce to date up 0.49 per cent.

“While the significant reduction in borrowing capacities and deterioration in affordability caused by interest rate rises implies larger price falls, this downwards pressure is being offset. 

“The impact of interest rate rises is being counterbalanced by the strong rebound in immigration, and tight rental markets, which combined with the limited stock on market are underpinning home prices.”

Ms Creagh said with the RBA pausing the rate hike cycle, home prices would continue to stabilise and buyers’ uncertainty will start to dissipate.

“If stock levels remain constrained, the bounce is likely to continue to firm,” she said.

Antonia Mercorella, REIQ 

REIQ Chief Executive Officer Antonia Mercorella said the pause was a welcome reprieve for homeowners and small businesses who were unfairly carrying the burden of fixing the inflation curse.

“Around 650,000 households in Queensland are mortgaged and it’s likely the RBA’s aggressive tightening cycle is already weighing heavily on many mortgage holders,” she said.

“A pause in interest rate hikes is an appropriate response at this time, allowing households and businesses a few moments to pause and assess their expenditure.

“It also gives firs- home buyers a chance to stabilise their borrowing capacity.”

Ms Mercorella said with loan activity for new builds in Queensland at an 18-year low, the rate would would give consumers more confidence to proceed with building their dream home.

She called for the government to ensure that fiscal policy did its part to curb inflation.

“Now it’s important that the government follows suit to ensure that fiscal policy matches monetary policy.”

Julie Toth, PEXA

PEXA Chief Economist Julie Toth said today’s interest rate hold would likely only be a pause and not the peak in the current cycle of increases.

“The RBA’s decision today holds Australia’s cash rate at its highest level since 2012, with all rises occurring in less than a year,” she said.

“These rate rises have contributed to falling average property prices and sales volumes nationwide, following record peaks in both pricing and sales volumes in early 2022. 

“A cyclical floor already seems to be forming in property market pricing in our largest cities, but this has not yet flowed through to other locations. Today’s pause will assist in stabilising prices.”

Ms Toth said lower listing volumes were providing some support for property prices, which was good for vendors, but exacerbated availability and affordability issues for buyers.  

“Housing availability constraints look set to continue until Australia’s chronic lack of housing supply can be addressed,” she said.

“Looking ahead, the RBA continues to flag the possibility of further rate rises in 2023. 

“The pace is set to slow however, with smaller monthly increases and/or pauses potentially on the horizon as we reach the top of the current rate rise cycle.”

Emma Slape, Turner Real Estate 

Turner Real Estate Chief Executive Officer Emma Slape said the market had been hoping the RBA would hit pause on interest rates today.

“The market certainly was expecting, and hoped for rates to remain at the current levels this month, so this will give borrowers some relief moving into Easter,” she said.

“The market is already cautious due to the rapid succession of rate rises, so we would expect more of the same, with people taking a ‘wait and see’ attitude towards decisions which could mean additional borrowings.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

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