RBA pauses cash rate at August meeting
In a move widely anticipated by the markets, the Reserve Bank of Australia (RBA) has decided to hold the official cash rate steady at 4.35% during its August Board meeting.
This decision comes amid ongoing efforts to curb inflation and stabilise the economy, following positive data that indicated inflation is heading in the right direction.
Inflation data integral to decision
In the weeks leading up to the RBA’s decision, Chris Hall, Managing Director and Finance Broker at Blue Crane Capital, noted that the country’s anticipation was focused on July’s quarterly inflation data.
While the annual rise of 3.8% for the June quarter is up from 3.6% in the March quarter, underlying inflation, which reduces the impact or irregular or temporary price changes in the Consumer Price Index (CPI), tracked down for the sixth consecutive quarter.
“This reinforces that inflation is trending downward. Now it’s a matter of if this trend continues,” he said.
Joanne Nugent, Owner and Manager of Mortgage Choice in North West Brisbane, echoed this sentiment, highlighting the broader economic implications of further interest rate increases.
“Everyone is feeling the pinch of the rising costs of basic living expenses, said Nugent (pictured above right). “Even with inflation coming down, the prices are still going up (albeit at a slower rate) and more than wage increases compensate for.”
“I’m grateful for yet another rate pause rather than a rate hike. Yet I still think it’s too early to consider rate cuts.”
The price of stability: Mortgagors shouldering the load
While the small minority of experts (19%) forecasted a rate hike, most (81%, 29/36) expected the RBA to hold coming into today’s meeting, according to Finder’s RBA Cash Rate Survey.
Graham Cooke, head of consumer research at Finder, said mortgagors were now anxiously waiting for a cash rate cut.
“Millions of Aussie borrowers are experiencing significant mortgage stress due to the fact that their monthly repayments have blown out so much and so rapidly,” Cooke said.
“They’re waiting with bated breath for any sign of relief from the RBA.”
Stressed borrowers who purchased right before the rate rises in 2022 at the top of their budget are dangerously close to breaking point, according to new research from financial comparison site Canstar.
A dual-income couple earning a combined average income of $184,060, who maxed out their borrowing capacity and purchased a home in early 2022 before recent interest rate rises, could now be contributing approximately 43.90% of their before-tax income to repayments.
“The good news is our experts say there’s a 56% chance of a rate cut in the next 12 months. The bad news is one in three say we will see a rate rise,” Cooke said.
Two thirds of experts (67% 16/24) who weighed in believe mortgage holders are shouldering too much of the burden from the RBA’s attempt to curb inflation.
Even so, Nugent said some stability in the rates is a “good thing” given the ferocity with which borrowers have had to weather rate rises over the last couple of years.
“Many clients are starting to reconsider borrowing again – particularly in regard to property purchases – with more confidence that we are at the peak of the rate rises,” Nugent said.
“This provides more certainty and confidence that the repayment amount at settlement of their loan shouldn’t increase significantly at least in the short term.”
Are higher-but-stable interest rates the new norm?
While many mortgagors would likely be thankful for the RBA’s decision, Hall worries the sustained pauses could be a “double edge sword”.
“It’s a sigh of relief for borrowers however this could also lead to the belief that we are now at the top and rates will start to come off early next year,” Hall said.
Hall noted there has been significant uptick in activity in his office since the inflation announcement last week.
“Will this mean that no rate change might give households more confidence about budgeting for the future and in turn lead to more spending? Only time will tell.”
For this reason, Nugent doesn’t expect to see any rate cuts until next year.
“If the RBA cuts rates prematurely, inflation may rebound quickly, and we’ll be back facing future rate rises again,” she said.
Nugent said holding rates makes sense as borrowers settle into these higher-but-stable rates as being the “new norm”.
“The impact of rising rates can take months to be visible in the reported economic indicators so holding them at this level, but for a longer period before reducing them makes sense to me.”
