Interest rate rise averted, and there should not be any more

Millions of borrowers have cheered as the Reserve Bank held its cash rate at 4.1 per cent. Here’s why it’s unlikely to go higher.

The Reserve Bank of Australia has kept its official interest rate on hold for the second straight month, and there are strong arguments for it to stop climbing.

Despite several economists still predicting one or two more increases in this rapid rate-rise cycle that started in May 2022, factors are piling up to put downward pressure on the 4.1 per cent cash rate.

An increasing stack of statistics shows that the RBA’s efforts to stop soaring inflation seem to have succeeded, and it suggests that further rate rises would knock Australia into a recession rather than get inflation down any faster.

Here are 13 reasons why the cash rate is unlikely to rise further.

1. Inflation growth is moderating, with the Consumer Price Index falling from an annual rate of 7.8 per cent last December to 6 per cent by the end of June. It is a lagging indicator because it reflects the past – not today’s conditions, which many say are weaker.

2. The latest CPI figures show that in the June quarter inflation rose just 0.8 per cent – that’s an annualised figure of 3.2 per cent and is already getting close to the RBA’s 2-3 per cent target band.

The Reserve Bank’s rate rise cycle has been rapid. Picture: NCA NewsWire/Joel Carrett

3. Retail trade – a key driver of inflation – is sinking, with last week’s official data showing turnover fell 0.8 per cent in June amid weaker than usual end-of-financial-year sales.

4. Even richer shoppers are spending less – with higher-end retailers David Jones and Country Road reporting a sharp slowdown in sales and blaming high interest rates.

5. Economists say slower consumer spending means many retailers now have too much stock and are likely to do more discounting, which puts more downward pressure on inflation and rates.

6. Consumer sentiment is at “deeply pessimistic” levels, which Westpac attributes to the surging cost of living and sharply higher interest rates. Pessimistic consumers don’t spend as much, so retailers are less likely to increase prices and push up inflation.

7. Banks are doing the RBA’s job for it, with several raising both variable and fixed rates in recent weeks. This has the same impact on borrowers as official rises: higher repayments and less money to spend.

8. The dreaded mortgage cliff is only now hitting borrowers, as people who locked in fixed-rate home loans two years ago below 2 per cent are now finding their interest rate reverting to 6 per cent-plus – a sudden spike in repayments of almost 60 per cent. That has to hurt.

9. A 20 per cent annual slump in new home loans for both owner occupiers and property investors – unveiled by the Bureau of Statistics Tuesday morning – shows that the market for mortgages remains weaker, and that borrowers are doing it tough.

Statistics suggest the RBA has done enough on rates. Picture: iStock

10. Business confidence is taking a hit, and has been below average since the RBA starting raising interest rates in May 2022, according to the NAB Business Survey.

11. Household cash deposits have dropped for the first time since the mid-2021, according to banking regulator APRA, suggesting that Australians are now eating into their savings to afford higher interest rates and other cost-of-living pressures.

12. Unemployment remains low at 3.5 per cent, but is expected to rise. Redundancies by major companies and businesses lowering their headcounts amid slumping sales will have an impact.

13. Wages growth has been a worry for the RBA and is a reason why it may lift rates, but the latest ABS data puts wages growth nationally are 3.7 per cent – well below inflation’s 6 per cent – and any rise in redundancies is likely to keep a lid on it and prevent a wage-price spiral.

Originally published as Interest rate rise averted, and there should not be any more