Reserve Bank leaves interest rates on hold at 4.1 per cent in a win for struggling households
A sharper-than-expected drop in inflation has allowed the RBA to leave interest rates on hold for a second month, but warns that further hikes may be on the way.
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A sharper-than-expected drop in inflation in the year to June was enough for the Reserve Bank to keep interest rates on hold for a second consecutive month, offering further relief to struggling households.
The decision by the RBA to keep rates on hold at 4.1 per cent is just the third time it has decided to do so in the 15 times it has met since May 2022 and comes after a mixed month of economic data that showed inflation rose 6 per cent in the year to June 30 amid a hot labour market.
Outgoing RBA governor Philip Lowe who will leave his post after next month’s meeting warned that Australia’s economy was in a period of below-trend growth, which was expected to continue for a “while”.
The RBA forecasts GDP growth to be 1.75 per cent in 2024 and 2 per cent the following year.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” he said.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
Dr Lowe added that further tightening of monetary policy may be required to ensure that inflation returns to its 2-3 per cent target in a reasonable time frame.
“That will depend upon the data and the evolving assessment of risks,” he said.
“In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”
The RBA forecasts inflation to be at 3.25 per cent by the end of 2024 and within its target band of 2-3 per cent by late 2025.
Financial markets gave the odds of a 25 basis point rate hike as 17.6 per cent versus 54 per cent prior to the Australian Bureau of Statistics reporting last Wednesday that inflation last week.
While the decision will put a smile on many faces, households are being warned that further rate rises could be on the cards in the months ahead.
“Borrowers should plan for two more hikes. Regardless of the Board’s decision on Tuesday, preparing for higher rates is never a bad idea,” RateCity.com.au research director Sally Tindall said.
Commonwealth Bank expects that 4.35 per cent will be the peak cash rate with the next move from the RBA to be four rate cuts to 3.35 per cent by September 2024, while Westpac forecasts three cuts by December 2024 to 3.6 per cent.
NAB has warned that there was the potential for one to two more hikes in coming months.
VanEck head of investments Russel Chesler said that the RBA hitting the pause button again increased the risk of services inflation remaining elevate.
“A 25-basis point hike would have mitigated the risk of a tight labour market fuelling further wage increases, inflation still hovers at twice the RBA’s target level,” he said.
“We are now nearing the end of the hiking cycle, but consumers have no cause to cheer yet. We believe the central bank will need to hike one to two more times to reign in lingering inflation and wages risk.”
Tuesday’s decision by the RBA comes as money in the bank from households has dropped for the first time since May 2021, suggesting Australians are starting to eat into their savings buffers as the cost of living continues to rise.
Data released from APRA on Monday for June revealed deposits from households dropped by 0.6 per cent, or $7.76bn, from the previous month to $95.94bn.
Borrowers with a $500,000 have already seen repayments rise by $1134 in that time to $3469 per month, a total increase of $1701 on a $750,000 loan to and $2269 on a $1m mortgage, according to RateCity.com.au.
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