Eases pain and lifts confidence, say industry experts
It’s a move that was widely expected but nevertheless the Reserve Bank of Australia’s decision to keep interest rates unchanged at its first meeting of 2024, is a relief for struggling home loan borrowers.
After 13 increases since May 2022, the Reserve Bank led by governor Michele Bullock kept the official cash rate at 4.35% today following the release of data last week showing inflation at a better-than-expected 4.1%, rising only 0.6% in the December quarter.
It means the cash rate has not moved since the RBA made a shock call to increase it by 25 basis points to 4.35% in November.
The RBA’s February decision is the first under its new structure with board meetings reduced from 11 a year to eight (occurring roughly every six weeks). The central bank also held the first of what will be regular press conferences immediately after each OCR decision.
The Reserve Bank board said inflation continued to ease in the December quarter.
“Despite this progress, inflation remains high at 4.1%,” the RBA board said. “Goods price inflation was lower than the RBA’s November forecasts. It has continued to ease, reflecting the resolution of earlier global supply chain disruptions and a moderation in domestic demand for goods.
“Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high. This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.”
The board said higher interest rates were working to establish a more sustainable balance between aggregate demand and supply in the economy.
“Accordingly, conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target.
“Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target, on the assumption that productivity growth increases to around its long-run average. Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.”
The board said while there were encouraging signs, but the economic outlook is uncertain and the board remained highly attentive to inflation risks.
“The central forecasts are for inflation to return to the target range of 2% to 3% in 2025, and to the midpoint in 2026.”
Reacting to the Reserve Bank’s decision, AMP chief economist Shane Oliver (pictured above left) said it was no surprise that the RBA had left interest rates on hold.
“Since the last meeting, we’ve seen global central banks moving towards rate cuts,” Oliver said. “We’ve seen weaker job starter (figures) in Australia and also weaker retail sales figures and also a sharper than expected slowdown in inflation.”
“So all of that is consistent with the cash rate having peaked so it makes sense for the RBA to leave the cash rate on hold.”
Oliver said brokers and borrowers had experienced a long period of pain with 18 months of interest rate hikes from May 2022 to November 2023 – the fastest and biggest tightening cycle since the late 1980s.
“That’s obviously been a dampener on demand for mortgages but also caused significant amounts of stress for households with big mortgages so this (RBA decision) was good news. It’s contingent on inflation continuing to come under control but so far the signs are good.”
Three interest rate cuts predicted – Shane Oliver
Oliver said it was highly likely that this was the peak in interest rates and the next move would be down, “which means relief for mortgage holders later this year”.
“While the RBA remains somewhat cautious, just like other central banks are, we continue to expect the cash rate will fall from around the middle of the year and that by the end of the year we will have seen three interest rate cuts, bringing the official cash rate down to 3.6% from 4.35%,” said Oliver
“We also expect that all of that will be passed through to variable rate mortgage customers.”
How decision will affect brokers, clients – Blake Buchanan
Blake Buchanan (pictured above right), general manager of broker aggregator Specialist Finance Group (SFG) said the Reserve Bank’s announcement was a welcome one but no surprise.
“But that does not make the decision the correct one,” Buchanan said. “Arguably, the decision to lift rates was far too late and the successive increases were too much too soon.”
“Whilst these successive and large increases accounted for the delayed action, it has now unnecessarily and adversely impacted many individuals and employers that assist in keeping the wheels of the economy turning.”
Buchanan said in terms of the impact on brokers and their customers, confidence would lift, extending to “more properties transacting and those refinance ‘wait and see’ behaviours turning into action”.
“Brokers having the biggest slice of the lending pie in Australia will be at the forefront of these transactions and will benefit as a result by helping more borrowers with their goals and savings.”
Buchanan urged brokers to reach out to their customers following the RBA decision.
“Brokers should be on the front foot with communications to existing and prospective clients about the current financial market,” he said.
“Whilst the rate hold is wonderful news for borrowers, property prices and interest rates remain lofty which means loan amounts and affordability are often restricted. Tips and tricks for savings and what lenders look at when it comes to affordability assists with financial literacy and achieving goals.”
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