RBA takes more moderate approach with 0.25 per cent cash rate increase

After a series of bullish interest rate hikes in recent months, the Reserve Bank of Australia has tempered its approach, increasing the cash rate by 25 basis points at its October meeting today.

A large proportion of economic experts had tipped another 50 basis point jump, but the sixth successive rise lifted the cash rate to the lower option of 2.6 per cent, as the RBA treads a fine line between curbing inflation and avoiding recession.

Borrowers will need to pay an extra $78 per month on a $500,000 mortgage, which is an increase of $700 since May.

RBA Governor Dr Philip Lowe said the Board was keeping a close eye on Australia’s economic growth and today’s rise would help move inflation towards the goal of 2-3 per cent.

“The cash rate has been increased substantially in a short period of time,” Dr Lowe said.

“Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”

Dr Lowe said further interest rate hikes were likely in the months ahead, as the Board seeks to curb ongoing inflation.

Their current predictions indicate inflation will peak at about 7.75 per cent around the end of the year before pulling back to 4 per cent in 2023 and 3 per cent in 2024 as global supply-side problems, drops in commodity prices, and rising interest rates take effect.

“The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade,” Dr Lowe said.

“The labour market is very tight and many firms are having difficulty hiring workers. The unemployment rate in August was 3.5 per cent, around the lowest rate in almost 50 years. 

“Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. 

“Beyond that, some increase in the unemployment rate is expected as economic growth slows.”

Wages growth has continued to climb, while price stability joined sustained full employment as a prerequisite for a strong economy, both of which the board is monitoring closely.

Dr Lowe said one source of uncertainty was the outlook for the global economy, which has deteriorated recently. 

Another is how household spending in Australia responds to the tighter financial conditions.

“Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments,” Dr Lowe said.

“Consumer confidence has also fallen and housing prices are declining after the earlier large increases. 

“The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.” 

Geoff Lucas – The Agency

The Agency Chief Executive Officer Geoff Lucas said today’s lower than expected rate rise had an immediate impact on consumer sentiment, with the ASX bouncing 3.8 per cent – the biggest intraday jump in two years.

He said it again raised the question about where the terminal rate would lie and while some economists were tipping 4 per cent, he said the CBA was likely closer to the mark with its 3.1 per cent prediction.

“People know there is actually an end in sight and so they get more confident,” Mr Lucas said.

“They didn’t know where it was going to end before, so sellers didn’t want to sell, and they knew that buyers weren’t buying, so nothing was happening.”

Mr Lucas said he expected to see an uptick in spring selling activity as a result of today’s rate decision.

“I do believe that we will see the market free up a little from where we are,” he noted.

“It won’t be a typical spring, and it will be later, but we will now see a slight freeing up of transactions.”

Mr Lucas also noted that the reason behind today’s lower than expected rate increase was likely due to the delicate balancing act of curbing inflation while avoiding recession.

He said there was a lag between earlier rate rises and impacts reaching consumers, so the RBA had pulled the latest rate hike back a little so it could astutely assess its earlier changes.

“They’re being prudent and thinking, if we do overdo it, we might risk a recession,” Mr Lucas said.

Going forward, Mr Lucas tipped another 25 basis point increase in November before a likely pause to coincide with Christmas.

“Of course this all needs to be put into context of what happens internationally,” he said.

“We can’t be too far out of step with the US interest rates because the dollar starts to suffer.”

Manos Findikakis – Agents’Agency

Agents’Agency CEO Manos Findikakis said we had reached the “coal face” of the slowdown in the property market and today’s interest rate rise emphasised that. 

But he said in the past couple of weeks, sentiment and springtime activity had lifted.

“In the last couple of weeks we have seen buyer activity and seller confidence increase, and a meeting of the market,” Mr Findikakis said.

“We feel like it has shifted already and, as we’ve predicted in the past, especially since Covid and with the information age, the peaks and troughs in the property market are becoming a lot shorter.”

Mr Findikakis said the market mood now changed from week-to-week, rather than on a month-to-month basis.

He said buyers and sellers now had access to a vast array of economic data and greater knowledge led to greater confidence.

“People have access to all of that information and they can make more informed decisions,” he said.

“I also feel that we’ve been in such turbulent times over the past three years that people accept turbulent times as part of the norm… we’ve become educated that catastrophe and the end of the world actually doesn’t happen.

“So it (interest rates rising) is not so much about it being catastrophic, but that it’s a bump in the road in people’s plans.”

Mr Findikakis said one lever that had the potential to combine with future interest rate rises in a less than ideal way was in the employment market.

He said at the moment unemployment was still at record lows, and there is a talent shortage, which will likely lead to increased migration.

But he said some sectors, such as retail, were analysing staffing numbers.

These factors could lead to an increase in unemployment in the future and alter some homeowners’ ability to meet mortgage repayments.

Thomas McGlynn – BresicWhitney

BresicWhitney CEO Thomas McGlynn said six successive interest rate rises hadn’t affected buyers’ appetite to buy, but it had hit their ability to borrow and how much they could borrow.

“I think everyone has come to the realisation that we are going to continue to see interest rates rise,” he said.

“But the thing that’s going to start affecting the buyers is how much can they borrow?

“What we’ve seen so far is that for the buyers that are new into the marketplace, or have been in the marketplace for quite some time, they have to reapply for their finance approvals, and while the type of property that they wanted to buy hasn’t changed, but the price or the loan that they’re able to get has.

“I think that’s something for the market to navigate over the course of the next month or two.”

Mr McGlynn said up until this point, the impact of the previous interest rate hikes had largely been “sentimental” for buyers, but those rises were now starting to flow through and hit hip pockets. 

He said many homeowners who had previously been on fixed-rates were about to come off those set payments into the variable rate environment and that would add some complexity.

Certain types of properties were also being treated differently by buyers and this was having an impact on sale and clearance rates as well as prices.

Mr McGlynn said properties that offered a great lifestyle and ticked all the boxes on a lot of buyers’ wishlists were still faring well, but those at the opposite end of the scale were faltering.

“A property that has a lot of the features that a large proportion of buyers are looking for hasn’t seen a huge amount of drop off from what was happening at the start of the year or at the end of last year,” he said.

“But a property that has quite a significant amount of limitations, with those you’re going to notice a large difference with buyer engagement, and therefore the price that is being achieved. 

“That’s probably one of the biggest biggest differences that the interest rate rises have affected, it’s pronounced the different categories of properties in a different way.”

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said the RBA had started to ease its foot off the brake pedal by slowing the size of its latest hike to 25 basis.

But he noted there were more rate rises to come with most economic projections still seeing the cash rate ultimately settling between 3.25 per cent to 3.75 per cent in this cycle.

“With the RBA projecting inflation to still be unacceptably high at around 7.75 per cent at the end of 2022 and only reducing to above 4 per cent in 2023, there needs to be more work done to bring inflation back to between 2-3 per cent,” he reflected.

“More rate rises are entirely consistent with where the RBA will be looking however it’s fairly clear that the RBA is now looking to assess the impact of the previous rate rises on the Australian economy and really see how these manifest themselves over the next few months, particularly in light of the more aggressive rate rise environment being seen in other developed countries.”

Mr Cocks said it was also worth remembering that compared to other developed economies, the inflation rate in Australia is lower, as the economy has been able to better balance demand and supply.

“As a result, the RBA won’t have to match the rate increases currently being seen elsewhere in the world.

“That said, allowing the rate gap with other major world economies to increase too far will see the Australian dollar come under more pressure which, while helping out exports, will add to inflationary pressures.”

Mr Cocks explained that by lengthening the interest rate normalisation process, the RBA would extend the time for real estate markets to achieve more normal behaviour.

“We’ve already seen a big drop in the number of finance approvals from the banks, and there is still a big buffer in the serviceability margins that are applied,” he noted.

“Given that we’re closer to the end of the current cycle of interest rates increases, is it time for the regulators to start trimming this buffer as it will be pricing many people out of the markets with settings that were applied when the cash rate was parked at 0.1 per cent?

“With very low unemployment and also rental vacancy rates, combined with the high cash reserves and serviceability buffers built into the majority of recent loans, indicators remain very positive for real estate and once we see a level of stability return to interest rates, it’s likely that we’ll see an increase in transaction levels.

“If the RBA drags this process out, it’s just going to take us a bit longer to get there.”

Nigel O’Neil – Barry Plant Group

Barry Plant Group CEO Nigel O’Neil welcomed the RBA’s more moderate approach, noting it could indicate the cash rate was headed for a pause at around 3 per cent.

Tipping next month would see a further 0.25 per cent cash rate increase, Mr O’Neil said at that stage the RBA might take stock of inflation and the economy before deciding whether to hike further or or hold.

“The 0.25 per cent increase now might indicate we are more likely to see a pause around the 3 per cent mark,” he speculated.

Mr O’Neil also noted, for many, the impact of this year’s series of interest rate rises was yet to be felt.

“There is over $200 billion worth of fixed rate mortgages that will revert to variable in 2023,” he noted.

“So the reality is for a lot of people there has been little impact. That pain has been deferred.”

Where it was being felt is in borrowing capacity, he continued, explaining that was a key factor in why house prices were cooling.

Mr O’Neil said as a result, there had been an unusual start to spring.

“Certainly compared to the past couple of years we’ve seen a slower start,” Mr O’Neil said

“We’ve seen fewer listings than normal rather than the typical surge but there could be a late increase and this more moderate cash rate increase might help spur that on.

“The reduction in rate rises now might give consumers confidence that people can feel their way through the impact of recent increases.”

Nerida Conisbee – Ray White Group

Ray White Chief Economist Nerida Conisbee said picking when interest rates would peak continued to change depending on “what week you ask the question”.

She said there were many ways to predict an answer but, right now, looking at market expectations, including the ASX 30 Day Interbank Cash Rate Futures, perhaps provided the best indication. 

“Investing in this allows users to hedge against inflation and better manage their exposure to cash. 

“Trading of the futures allows us to see what investors think will happen to the cash rate. Recently, it has been pretty accurate although this month, it overstated the increase, predicting a 0.5 per cent increase (it was 0.25 per cent). 

“As to when rates peak, however, continues to shift a lot more and changes depending on what week it is. This reflects how changeable economic data and sentiment are at the moment.” 

Ms Conisbee said inflation remained high in Australia and while there has been some signs that it could start to fall, such as oil and shipping prices falling, large increases in construction costs could keep inflation up.

What’s happening in the global economy could also impact Australia, and there are concerns some countries may go into recession.

“The country with the biggest problems right now is the UK,” Ms Conisbee said.

“Last week, the UK Government announced tax cuts including payroll taxes, income taxes and stamp duty. The measures were introduced due to the threat of a looming recession. 

“But the move is badly timed given that it will further fuel inflation (already at 10 per cent) and will require a lot more borrowing by the government. 

“There are now concerns about Britain’s financial stability. The value of the pound compared to the USD sank to the lowest level ever recorded.”

Ms Conisbee said the September quarter inflation data would come out this month and the new monthly Australian Bureau of Statistics preliminary inflation figures would give a more up-to-date view on how interest rate rises were affecting inflation rates.

“If the rest of the world heads into recession, hopefully we will once again be the outlier like we were following the Global Financial Crisis,” she said.

Mathew Tiller – LJ Hooker

LJ Hooker Head of Research Mathew Tiller remained optimistic about the impact of the sixth consecutive interest rate rise, tipping affordability, low unemployment rates and higher rental growth will ensure buyer demand slowly improves.

“The good news is that we can see signs of activity picking up with auction data showing clearance rates in Sydney have been above 60 per cent for the past four weeks,” he said.

“Interest and inquiry levels from investors have improved due to low rental vacancy rates and higher tenant demand pushing rents considerably higher over the past 12 months. 

“The changing conditions will likely also see bargain hunters emerge looking for a property with potential for future capital growth.”

Mr Tiller said the spring selling season had started slower than normal, with public holidays impacting the market, but he expected listings to increase in the coming weeks.

He said listings had increased 4 per cent on last month and 1.4 per cent on last year for the LJ Hooker Group, while appraisals were also 5.2 per cent up on last month and 12.3 per cent higher than last year.

Mr Tiller said the latest rate rise would see buyers reassess their borrowing capacity and serviceability. 

“In turn, ‘days on market’ is likely to rise as buyers become choosier about the homes, but we expect to see more activity in late spring,” he said.

“There are some positive signs in the economy with latest GDP results strong at 3.6 per cent driven by household spending and exports, while unemployment remains buoyant at 3.5 per cent. 

“Although there remain some major global inflationary issues which the RBA can’t control such as the US inflation, Ukraine war and UK economic woes.” 

Eleanor Creagh- PropTrack

PropTrack Senior Economist Eleanor Creagh said despite a more moderate increase than in months gone by, today’s 0.25 per cent cash rate rise would further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down.

The fastest rise to the cash rate since 1994 has seen home prices falling across the country, with prices nationally now sitting 3.35 per cent below their March peak,” Ms Creagh said. 

“As borrowing capacities are constrained and buyer’s budgets shrink, the most expensive markets of Sydney and Melbourne have led the price declines.”

In the period ahead, Ms Creagh said interest rates would remain a key determinant of housing market conditions and the pace and depth of home price falls.

“Outside of the housing market, the economy has entered the tightening cycle with strong momentum and although consumer confidence has fallen, the labour market remains tight, the unemployment rate is at a 48-year low, spending is yet to slow, and business conditions remain strong,” she said.

“However, the lagged effect of rate rises, large share of variable rate borrowers ahead on repayments and borrowers on fixed terms yet to expire, means many mortgage holders are only now beginning to feel the impact of the initial rises.

“The tight labour market, along with advance repayments and savings and wealth buffers, reduces arrears risks, but still the outlook for discretionary spending has shifted and a slowdown in spending seems inevitable.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.