Australian mortgage holders are breathing a sigh of relief this afternoon after the Reserve Bank of Australia opted to keep interest rates on hold.
For the second consecutive month Governor Philip Lowe left the cash rate unchanged at 4.10 per cent, following an increase in interest rates of four per cent since May last year.
And while Dr Lowe acknowledged some Australians were feeling the financial pinch, he said others were benefiting from higher property prices and savings buffers due to the higher interest rate environment.
He also left the door open for further tightening of monetary policy, meaning he could literally go out with a bang at his final meeting as the central bank’s head in September.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Dr Lowe said.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month.
“This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
Dr Lowe said inflation in Australia was falling but remained too high at six per cent and while good price inflation has eased, the prices of many services were rising fast.
Rent inflation is also elevated.
“The central forecast is for CPI inflation to continue to decline, to be around 3.25 per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025,” Dr Lowe said.
“The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while.
“Household consumption growth is weak, as is dwelling investment.
“The central forecast is for GDP growth of around 1.75 per cent over 2024 and a little above 2 per cent over the following year.”
Dr Lowe said conditions in the labour market remained tight and wages growth had picked up in response to that as well as high inflation.
But he said wages growth was still consistent with the inflation target, provided productivity growth picks up.
“Returning inflation to target within a reasonable timeframe remains the Board’s priority,” Dr Lowe said.
But he also warned there were “significant uncertainties” in the economy, with services price inflation surprisingly persistent overseas.
It’s possible the same could occur in Australia, Dr Lowe said.
“There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.”
“The outlook for household consumption is also an ongoing source of uncertainty.
“Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.
“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.
“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 the data and the evolving assessment of risks.”
Dr Lowe said the Board would continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
Geoff Lucas – The Agency
The Agency’s Chief Executive Officer Geoff Lucas said today’s rate pause was good news for the economy.
“It means the RBA has detected movement indicating the previous rate increases have begun to have an impact on the economy, and now wishes to assess more data to ensure the impact continues,” he said.
“The downside to the pause is that it can cause sentiment to improve, which sets off further inflationary drivers.
“We’re now seeing a significant increase in residential listings on the eastern seaboard.
“As a result, the mini boom in prices over the last quarter has begun to taper, with some markets showing signs of stagnation or even decline.
“This is a significant shift in momentum as what was a strong seller’s market moves toward equilibrium and toward signs of a buyer’s market in some cases.
“We believe this shift will continue with further decreases in price growth trending to overall softness later in the year and into the first part of 2024.”
In Western Australia, Mr Lucas said the opposite was true.
“What has been an exceptionally strong market is now showing signs of a slight decrease in listings, similar to what occurred the past year on the eastern seaboard,” he said.
“The reduction in supply, strong economy, high liveability, investor demand and growing migration from the eastern states will all serve to ensure continued price stability during a slowing in volumes.”
Mr Lucas said the danger with today’s rate pause was that while overall inflation was moving in the right direction, services inflation remained strong.
He said this component was hard to shift and could be susceptible to a rebound in consumer sentiment.
“Worldwide it’s expected that the inflation issue will remain for longer than expected,” Mr Lucas said.
“An increase today would possibly have sent a message that all’s not well and caution is necessary.
“That could have been helpful in the fight against inflation.”
Mr Lucas said there were several factors that suggested inflation was not yet under control,
with energy prices and wages contributing to increased inflation from July.
He said rent increases were also not fully reflected in the inflation data.
“In addition, Australia has the highest amount of savings ‘buffer’ from pandemic stimulus,” Mr Lucas said.
“It’s this buffer that’s keeping the services component of inflation strong.
“That buffer isn’t expected to dry up until late in the calendar year, around the same time the full impact of the mortgage cliff is being felt, and unemployment begins to rise.
Don’t get me wrong – the CPI movement last week was positive – it’s just that inflationary pressures remain and a further increase would assist in keeping the foot on the throat of inflation.”
Mr Lucas said it was “quite possible” there would be one more rate rise before Christmas.
“The data shows monetary policy is beginning to work – and sometimes when the symptoms of an illness are tapering off it’s good to keep up the medicine – no matter how it tastes,” he said.
Manos Findikakis – Agents’Agency
Agents’Agency Chief Executive Officer Manos Findikakis said there would be no further interest rate rises for the rest of 2023.
“We’ve experienced ‘the great realignment ’ of the property market over the last 12 months and we have reached a new plateau,” he said.
“Whilst the economic figures point towards a slowdown in consumer spending, the hold on interest rates will provide some certainty to both buyers and sellers.”
But Mr Findikakis said he did not foresee an increase in sales volumes or prices as a result of today’s interest rate decision.
“Those in the market would be aware and informed of current pricing and I believe will be making purchasing and selling decisions based on these levels without any ‘guess work’ or thoughts that we will see any significant upswing or downward pressure,” he said.
“With a hold on interest rates and the decreasing pressure on wage growth, this will be the ‘new normal’ for a protracted period.”
Thomas McGlynn – BresicWhitney
BresicWhitney CEO Thomas McGlynn said the RBA’s decision to hold rates steady would further bolster the confidence of Sydney homeowners and buyers.
“We know that June and July have played host to unseasonably strong market activity, with it now clear that many of the traditional seasonal peaks and troughs are not as relevant as they were pre-pandemic,” he said.
“Some seasonality has and will remain though across the market, pertaining mostly to the expected, yet modest dips in open home attendance, and comparative volume of property changing hands.
“While it’s likely that price growth for Sydney peaked in Q2 – a five-plus per cent uptick for the prior three-month period, and a further 0.9 per cent rise for July according to CoreLogic – we do not see activity levels following a similar trajectory.
“Across BresicWhitney we have transacted on and listed, at times, triple what we had the privilege of acting on this time last year.
“With volumes for August and Spring likely to remain buoyant, and in line with today’s announcement, we expect that the remainder of the calendar year will continue to record elevated activity levels.
“Finally, yet importantly, we perceive there to be adequate buyer demand and depth to meet these sellers.”
Mathew Tiller – LJ Hooker
The RBA’s decision to keep interest rates on hold for the second consecutive month will boost buyer confidence in the leadup to the traditional spring selling season, according to the LJ Hooker Group.
New listings are expected to continue to rise ahead of a busy September, but total listings remain well below average levels.
LJ Hooker Group’s Head of Research, Mathew Tiller said with inflation coming down faster than expected, the RBA has been cautious about the impact of increased rates on the economy even with strong employment data.
Annual headline inflation fell from 7 per cent in the March 2023 quarter to 6 per cent in the June 2023 quarter.
Another positive sign was that the annual trimmed mean inflation (which excludes volatile items) also fell from 6.6 per cent to 5.9 per cent which is important as it is often the RBA’s preferred measure of inflation.
“The pause is another boost to buyer demand and will give those with pre-approval the confidence to act without incurring more costs or worrying about the serviceability of their home loan,” Mr Tiller said.
“It allows transactions to go ahead without the stop-and-start of buyers going back to their lender and renegotiating which is what was happening when we were seeing monthly increases.
“While this is good news ahead of the spring market, we need to see the decline in inflation continue at the same pace, if it remains sticky then there is a chance they will increase interest rates again – so, we may not be at the end of the cycle just yet.”
The number of appraisals conducted by LJ Hooker has been on the rise in the lead-up to the spring market.
Sellers who are ready to go to market have been looking to take advantage of tighter listings and increased competition from buyers.
Cheap fixed-term mortgages are expiring but haven’t resulted in a rush of forced sales, Mr Tiller said.
Instead, homeowners may instead look to downsize their repayments by selling and purchasing a smaller property to free up the household budget.
While rents have been increasing, there is evidence some investors are looking to sell as the gap between income and expenses widens.
“Investors looking to sell up will be welcomed news for first home buyers who generally tend to be purchasing in the same market,” Mr Tiller said.
Nerida Consibee – Ray White
Ray White Group Chief Economist Nerida Consibee said it had been a “hard slog” to bring inflation down but it was getting increasingly closer to the targeted two to three per cent band.
However she also warned it may not be coming down “fast enough” to avoid one or two more rate increases, despite several promising signs.
“Domestic travel, electricity and fuel costs fell over the June quarter,” she said.
“The rapid increases in construction costs are nearing an end as demand softens and the cost of materials falls.
“International travel increases were high but are expected to come back as it was primarily driven by Australians heading to a European summer. Even potato price rises are expected to start to moderate as weather conditions for this crop improve.
“In the June quarter, inflation rose by 0.8 per cent, the lowest level in almost two years.”
Ms Consibee said there were also promising signs overseas with US inflation coming in at three per cent last month, as it neared its central bank’s two per cent target.
“It didn’t stop them raising rates last week but like Australia, it is expected that the increases will soon be over,” she said.
“Even in countries that have been very aggressive with rate rises, increases seem to be coming to an end.
“New Zealand’s rates have risen far more quickly than Australia, even forcing that country into recession, but the RBNZ has now flagged that they are just about done.”
Ms Conisbee said the “big problem” remained rental increases as there is a lag between advertised rents climbing and an increase in rents in already tenanted properties.
“It is the rents in tenanted properties that is used in the ABS inflation numbers,” she said.
“Increases in advertised rents are starting to slow but it will be some time before this slows down in the rental calculation used in the inflation numbers.”
Eleanor Creagh – PropTrack
PropTrack Senior Economist Eleanor Creagh said recent lower than expected inflation figures, paired back consumer spending, the job market holding steady and still rising services inflation had all combined to result in the RBA pausing rates today.
“Subsiding momentum in inflation and consumer spending has eased the pressure off the RBA to continue lifting interest rates,” she said.
“This allows more time to assess the economic outlook as it tries to engineer a soft landing whilst returning inflation to target.”
Ms Creagh said even though inflation was still high relative to history and well above the RBA’s 2-3 per cent target range, CPI inflation was below both market expectations and the RBA’s official forecasts and looks set to continue to moderate and move lower into the first half of 2024.
“Given that the full effect of the higher interest rates is yet to be felt, the risk that the economy will slow more than expected was weighed against the risk of persistent inflation pressures,” she said.
“Despite the tight labour market, with the unemployment rate holding at a multi-decade low of 3.5 per cent, and still rising services inflation, the full impact of recent rate rises is yet to be felt and we’re likely to continue to see inflation moving lower.
“Together this gave the RBA leeway for a continued pause in order to better assess how economic conditions unfold.”
Ms Creagh said the “substantial tightening” already pushed through had slowed consumer spending and business surveys indicated weaker conditions were expected in the coming months.
“However, although progress is being made, inflation remains elevated. Services inflation remains persistent and both headline and trimmed mean inflation are still well above target,” she said.
“As such, the statement highlighted that the board is ready to do more should it be necessary.”
More to come…