RBA keeps rates on hold, but for how long?

The Reserve Bank of Australia has held the cash rate steady for the fourth consecutive month, but a recent uptick in inflation has left the door open to another hike before Christmas.  

Delivering her first interest rate decision as RBA governor since taking over from Philip Lowe last month, Michele Bullock said the board held the official cash rate steady at 4.1% in October, where it's remained since June.

New RBA governor Michele Bullock took over the top job in September. Picture: NCA NewsWire / Martin Ollman

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However, Ms Bullock didn't rule out further rate hikes in the months ahead after rising fuel, rent and services costs pushed annual inflation back above 5% in August.

"Inflation in Australia has passed its peak but is still too high and will remain so for some time yet," Ms Bullock said.

"Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly and fuel prices have risen noticeably of late. 

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks."

Price movements can be volatile from month to month. When stripping out some products with big price swings - such as petrol, fruit and holiday travel - the Australian Bureau of Statistics said inflation actually eased during the month.

PropTrack senior economist Eleanor Creagh said inflation is expected to continue moving lower amid weakening household consumption and slowing economic activity. 

"The full impact of monetary tightening to date is yet to be felt and we’re likely to continue to see inflation moving lower as a result," Ms Creagh said.

"The significant increase in mortgage servicing costs, together with cost-of-living pressures, has seen consumer spending slow and weigh on economic activity. Conditions are expected to further soften in the coming months.

Ms Creagh said the decision to hold the cash rate steady again will underpin buyer and seller confidence for the spring selling season.

"Looking ahead, interest rates have very likely peaked and population growth is rebounding strongly," she said.

Home prices hit record high

The rate decision comes as home prices hit record highs in September, with the national median price rising 0.35%. 

The latest PropTrack Home Price Index showed the price falls of last year — triggered by rising interest rates — had been completely erased across much of the country, bringing the cost of a typical Australian home to its highest ever level. 

Ms Creagh said national home prices had now reversed 2022’s price falls in their entirety, with September marking the ninth consecutive month of national home price growth.  

"One driver of the recovery in home prices this year has been the subdued listings environment, which has seen buyers competing for fewer properties," she said.

"Together with a shortage of new home builds, prices are expected to rise and more markets will likely reach new record levels after recouping last year’s fast falls."

National home price activity in September:

The spring selling season has had a busy start, with buyer and seller confidence rising and choice improving significantly across the major capitals.  

Mortgage Choice chief executive Anthony Waldron said loan submissions data signalled a pickup in buying activity, with a 7% increase in purchases during September, while refinancing activity fell 6%.

“The largest proportion of loans coming off a fixed term occurred earlier this year, and with interest rates holding steady for several months, our submission data is showing a slowdown in refinancing activity," Mr Waldron said.

"The data also reflects the busy spring selling season, which is resulting in more properties coming to market and giving more buyers opportunity to buy.

"With the spring season well underway, and Christmas fast approaching, hopeful buyers will need to act quickly if they want to buy property this calendar year."

One more rate hike may come before Christmas

While the RBA was widely expected to hold the cash rate steady in October, economists are divided on the outlook, with some expecting one more rate hike before the end of the year.

HSBC chief economist Paul Bloxham said although inflation is now heading towards the RBA's 2-3% target band, it may not be headed there "quite fast enough".

"The good news is that the Australian economy appears to be traversing a 'narrow pathway' to dis-inflate with a 'soft landing' for growth, largely as the RBA had hoped," Mr Bloxham said.

"However, with inflation still well above the RBA's target band and the jobs market still fairly tight, we expect that the RBA's next rate move is still more likely to be up than down."

Stubborn inflation could see the RBA move one more time this year. Picture: Getty

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HSBC is forecasting one more 25 basis point hike before Christmas, likely at the November meeting after quarterly inflation data is released at the end of October.

NAB chief economist Alan Oster also expects one more rate hike with November the most likely timing.

"The recent run of activity data suggests there may be some downside risk to this, but the resilience in the labour market and potential for ‘sticky’ services still present an upside risk," Mr Oster said.

Other economists anticipate the cash rate has already peaked, with ANZ, CBA, Westpac and AMP forecasting an extended pause until next year when cuts are expected.

With hundreds of thousands of borrowers yet to roll off their fixed rates in the coming months, Mr Waldron said borrowers should start preparing now.

"I’d recommend these borrowers make time to speak to their broker and ensure they're prepared for the change in their repayments when their fixed term comes to an end.”

Analysis from realestate.com.au reveals borrowers who roll onto their bank’s standard variable rate at the end of their fixed loan term rather than refinancing could be paying tens of thousands of dollars in additional interest each year.

Originally published at: https://www.realestate.com.au/news/rba-keeps-rates-on-hold-but-for-how-long/