Restrictive policy here to stay until inflation moves towards target
Inflation is still too high for the RBA’s liking, and intends to keep rates elevated until it sustainably enters the target range of 2-3 per cent.
The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.35 per cent, in a move that was widely anticipated by economists and the market.
This now marks the seventh time the RBA has held the cash rate since its last hike almost a year ago during the November monetary policy meeting and the longest consecutive string of cash rate holds since the pandemic.
Following the decision, the board’s statement read: “In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.
“Sustainably returning inflation to target within a reasonable timeframe remains the board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case.”
The board further stated that while headline inflation will “decline for a time”, underlying inflation is “more indicative of inflation momentum, and it remains too high”.
“The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range.
“Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”
The RBA reiterated its stance that it will continue to rely on data and the evolving assessment of risks to guide its decisions and that it remains “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”.
Mark Haron, executive director at Connective said the hold was “good news”, however, it does not mean the pressure is off for borrowers.
“A challenging housing market, inflation and rising cost of living continue to affect households.
“Brokers have demonstrated resilience and expertise in helping borrowers navigate one of the toughest economic conditions. As we enter the busiest selling season this spring, their role is even more important as home buyers look to access finance and borrowers seek to secure better terms.
“Our advice to brokers is to continue proactively reaching out to their clients. Ask them what their long-term goals are, and educate them about their financing options that are aligned with these goals,” Haron said.
Mortgage Choice CEO, Anthony Waldron, commented the hold will be “welcome news for borrowers” as more hopeful buyers look to enter the property market with the spring selling season being in full swing.
“There are a couple of reasons why the Reserve Bank decided to keep the cash rate on hold in September,” Waldron said.
“The latest economic data from the Australian Bureau of Statistics (ABS) revealed that annual economic growth over the June quarter was the slowest since the 1991-92 financial year, suggesting that current interest rates are putting downward pressure on Australia’s economic growth.
“ABS data also showed that inflation is continuing to ease, with the monthly CPI indicator rising 3.5 per cent for the 12 months to July, down from 3.8 per cent in the 12 months to June. The RBA’s best tool to drive inflation towards its target range of 2-3 per cent is the cash rate, so while inflation is trending in the right direction, it’s still not low enough for the RBA to consider cutting the cash rate yet.”
CreditorWatch chief economist Anneke Thompson said the decision today was “unsurprising” due to the steady nature of inflation and labour force data.
“Both measures are performing broadly as the RBA had forecast, and are not currently presenting it with any need to alter its thinking around the timing of the first cut to the cash rate,” Thompson said.
“The most significant change in developments this month was the US Federal Reserve’s somewhat surprising 50 basis point cut to the US cash rate. The major message that this cut sent is that the world’s biggest economy is perhaps slowing faster than first thought.
“If the data continues its current trajectory of slowly softening, then the RBA is unlikely to change course and the first cut is unlikely to be before the year is out. However, one soft unemployment report could change this thinking quite rapidly.”
PropTrack senior economist Elanor Creagh said the cash rate was held “amid ongoing elevated price pressures”.
“Households are under pressure and retail sales and consumption are weak, while consumer sentiment remains low. Though employment growth has remained strong, and the unemployment rate held steady at 4.2 per cent in August, the labour market has softened over the past year,” Creagh said.
“Despite recent data showing the economy is tracking through a period of weak growth, the sustained pause reflects the RBA’s desire to keep inflation on its path back to target, while balancing downside risks for growth and the labour market.”
Simon Bednar, CEO of aggregator Finsure Group, said with inflation still being relatively higher than the RBA would like, he expects no change in the cash rate for the remainder of 2024 as the RBA “solidify any gains made this year and not spark inflationary pressure prior to Christmas”.
“I believe we’ll see our first rate cut in February next year, however, I would strongly stress that banks then will not pass on any reduction in full,” Bednar said.
“That means consumers and brokers will need to be realistic about how rate cuts flow into mortgages and the broader economy. Banks will be striving to recover margin quickly.
“With the rate increases making conditions tougher for mortgage holders, brokers have been playing a key role helping customers through the higher rates and the cost-of-living crisis.”
