RBA issues a reprieve and holds interest rates

Borrowers are breathing a sigh of relief today after the Reserve Bank of Australia (RBA) decided to leave the official cash rate on hold at 4.1 per cent.

RBA Governor Philip Lowe said the Board decided to hold rates to allow for more time to see how the previous 400 basis points of increases will impact the economy and the level of inflation.

“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,” Dr Lowe 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 economic outlook and associated risks. 

“In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the forecasts for inflation and the labour market.”

Dr Lowe said inflation in Australia had passed its peak and the monthly CPI indicator for May showed a further decline. 

“Inflation is still too high and will remain so for some time yet,” he said.

“High inflation makes life difficult for everyone and damages the functioning of the economy.”

Dr Lowe said growth in the Australian economy had slowed and conditions in the labour market had eased, although they remain very tight.

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

Geoff Lucas – The Agency

The Agency Managing Director and Chief Executive Officer Geoff Lucas said he had anticipated two interest rate rises over the next three months.  

“Today’s decision reflects the RBA’s intention to give consumers a slight break ahead of what I believe will now see interest rate rises in August and September in order to keep inflation in check,” Mr Lucas said.

“This, of course, is subject to any material changes in inflation, consumer spending and unemployment. 

“The RBA will also be keen to give more time to assess critical economic data, specifically the extent to which monetary policy is impacting inflation.”

Mr Lucas said looking further ahead we are unlikely to see interest rate falls for some time. 

“The inability to arrest underlying inflation means that interest rates are likely to be higher for longer than first thought,” he said.

“Those buyers who are prepared and who have been diligently saving will be able to take advantage of the market conditions due to the reduced volatility.”   

Mr Lucas said he had already seen a marked increase in the number of investment properties coming to market and increased supply levels giving hope to first-home buyers who have been waiting for an opportunity to enter the market. 

“The increase in supply will likely dampen any price increases in the near to mid-term,” he said.

Thomas McGlynn – BresicWhitney 

BresicWhitney CEO Thomas McGlynn said the Sydney property market had been incredibly strong despite higher interest rates.

“Clearance rates continued to exceed 80 per cent and listing volumes for BresicWhitney are triple that of a year ago,” Mr McGlynn said.

“This tells us, very clearly, that the interest rate environment has not significantly dampened the overall activity in, or appetite for, Sydney property.  

“Today’s pause in a further cash rate rise and May’s easing of inflation will add to that.”

Mr McGlynn said buyers were firmly staying within their financial limits at auctions. 

“This has emerged more strongly in the last fortnight, and it would be remiss not to recognise this as a sign that a certain level of caution does remain within the market,” he said.

“We do not know the exact shape of the months ahead, but what we do know is that buyers and sellers are preferencing a long-term outlook, ahead of getting caught up in the monthly peaks and troughs.”

Manos Findikakis – Agents’Agency

Agents’Agency CEO Manos Findikakis said the RBA went too hard in raising the rate last month, so a pause was welcome.

“Being at the coalface, we see in real time the impact high interest rates have on those vulnerable,” Mr Findikakis said.

“And today’s decision to pause the increase reflects that the key indicators that the RBA use have caught up with our thoughts.”

Mr Findikakis said market confidence has been impacted and there has already been a significant reduction in sales volumes.

“The everyday Aussie is feeling it and we can sense it and hear it from both buyers and sellers first hand,” he said.

“Borrowing capacity has been significantly reduced; buyers can’t stretch themselves further even if they wanted to. 

“We are also seeing businesses hold back on employing further talent and having a ‘wait and see’ approach. 

“I believe we may see another pause if not halt in further interest rate rises.”

Mr Findikakis also said the RBA using higher interest rates to curb things like rent increases is creating an unhealthy situation.

Mathew Tiller – LJ Hooker Group

LJ Hooker Group Head of Research Mathew Tiller said while mortgage holders would be relieved at today’s announcement, the current rate cycle may not be over.

“While there is the possibility of another rate rise, the decision to hold rates this month will give confidence that we are nearing the end of the cycle of increases,” Mr Tiller said.

“Days on the market has been falling and we’ve seen solid auction clearance results so we know that buyers are active. 

“Keeping interest rates unchanged will ensure that this buyer demand continues.”

Mr Tiller said property prices were still rising in every capital city and a rush of distressed sales was unlikely.

But he said some homeowners, particularly those who purchased prior to the pandemic, would see this as an opportunity to balance the household budget and improve their cash flow.

Terry Ryder – Hotspotting 

Hotspotting Director Terry Ryder said despite the decision to hold today, the RBA had already lifted rates too often and too much. 

“The outcome is likely to be a recession and hundreds of thousands of people losing their jobs, which the dismally untalented Philip Lowe says would be, “A pretty good outcome for Australia’,” Mr Ryder said.

“The arrogance is breathtaking.”

Mr Ryder said the RBA Board comprised wealthy elites who were not feeling the financial consequences of their actions. 

“Dealing with inflation should be the responsibility of the Federal Government, which has the power to defuse high inflation through actions that could reduce the cost of petrol, electricity, construction, rents and other major components of inflation,” he said.

Tim Lawless – CoreLogic

CoreLogic Research Director Tim Lawless said the RBA kept the door open for a rate hike in August, citing ongoing concerns around the trajectory of inflation amid tight labour markets and uncertainty relating to the household sector.  

“Currently high interest rates and the potential for a hike in August could weigh further on consumer sentiment, which is already around GFC lows,” Mr Lawless said.

“Housing activity could be further impacted if credit becomes less available.  

“Renewed growth in housing values is another factor weighing on RBA decisions. 

“While the RBA has been clear it doesn’t target asset prices, there is a risk that higher housing prices could keep inflation higher for longer as homeowners feel wealthier and more willing to spend.”

He said despite rates holding firm in July, we could see some a further dampening of the recent exuberance seen across housing markets, where values have generally been rising since March.

“As more borrowers are exposed to higher interest rates, either via rising variable mortgage rates or the expiration of fixed rates, we are likely to see a progressive increase in mortgage arrears, albeit from record lows last year,” he said.

Nerida Conisbee – Ray White

Ray White Chief Economist, Nerida Conisbee said that while the RBA took a break this month and rates remained on hold, there might be more ahead.

“Despite this rate rises may not be over, with markets continuing to price in more increases for the year,” Ms Conisbee said.

“While this is the case, prices across a range of assets including housing, shares and even bitcoin continue to rise.”

She said demand was back, even with higher rates, and a fear of missing out could be driving the uptick in prices.

Paul Ryan – PropTrack

PropTrack Senior Economist Paul Ryan said despite no change today, the RBA signalled more tightening may be needed to rein in inflation, with many expecting another hike to come as early as next month.

“The RBA judged that recent data on the labour market and inflation was in line with its expectations, and opted to wait for additional data on inflationary pressures and productivity growth, in particular,” Mr Ryan said.

“More tightening is expected to be needed to bring inflation back to the RBA’s target, but rates are close to their peak, which is good news for the housing market.

He said so far, the housing market had shown remarkable resilience to sharply higher interest rates. 

“Despite rates now at levels not seen since 2012, home prices increased further in June, and are up 2.3 per cent over 2023 so far,” Mr Ryan said.

“Forward indicators point to further home price growth in the months ahead.

“But continued higher interest rates remain a risk for the housing market. 

“At some point, eroded borrowing capacities and weaker economic conditions brought about by higher interest rates may lead to price falls, as seen in 2022.”

Hayden Groves – REIA

The Real Estate Institute of Australia President Hayden Groves said with inflation back in target range, a pause mades sense.

“Last week’s CPI shows inflation is abating and that a pause in rate rises would be sensible,” Mr Groves said.

Steve Mickenbecker – Canstar

Canstar’s Finance Expert Steve Mickenbecker said even though rates paused, borrowers were still feeling the pain.

“Borrowers could already be buckling under the pressure of paying an extra $1217 in monthly repayments on a $500,000 loan since the Reserve Bank started lifting rates in May last year,” Mr Mickenbecker said.

“At least there is a reprieve in July.”

He said buyers who jumped into the market, borrowing up to their limit, in the lead-up to the first Reserve Bank rate increase in May last year, would particularly feel the pain. 

“Two more rate increases will see repayments absorbing around 45 per cent of borrowers’ before-tax income, well and truly at stress levels,” he said.

Louisa Sanghera – Zippy Financial

Zippy Financial Director Louisa Sanghera said common sense had prevailed today. 

“There was no reason why there should have been an increase this month,” Ms Sanghera said.

“We are seeing the continued downtrend in the Australian Monthly CPI Indicator as providing confirmation that inflation has now peaked.  

“I think everyone will be pleased to have a breather from the 12 rises we’ve already had.

“Perhaps now the RBA Board will sit back and watch inflation for the next few months, rather than inflicting more stress and pain on homeowners.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.