RBA pauses interest rates in July although inflation still a huge concern

The RBA has held interest rates steady as homeowners around the country breathe a palpable sigh of relief.

The RBA has paused interest rates at its monthly meeting in a move that will be a massive relief for millions of borrowers around the country.

On Tuesday afternoon, the RBA announced it was keeping the cash rate at 4.1 per cent amid widespread speculation that split economists down the middle over whether the bank would raise or hold the rate.

Australia’s central bank has hiked interest rates every month since May last year, with the exception of April and now, when rates were momentarily paused.

Still, as it stands, Australians are in the throes of the nation’s highest cash rate since 2011, enduring 400 basis point increases over the space of a year.

The cash rate has jumped significantly from the historic pandemic low of 0.1 per cent in what has been dubbed the fastest tightening cycle on record.

Consumer price index (CPI) figures released last month are to thank for the RBA’s sudden U-turn, which showed their war against inflation is working.

The latest monthly CPI from the Australian Bureau of Statistics found inflation had fallen to 5.6 per cent for the month of May, down considerably from the previous month where it stood at 6.8 per cent.

Ultimately, however, this is still far below the RBA’s target of keeping inflation between two to three per cent, sparking warnings that more rate rises are still lurking on the horizon.

In light of the recent decision, RBA governor Phil Lowe said they had decided to pause rates to further “assess” the economy.

However, he did not rule out more interest rates rises, vowing that the RBA would do everything in its power to bring inflation to a manageable level.

Governor Philip Lowe has made a decision on interest rates on Tuesday afternoon for July. Picture: NCA NewsWire / Martin Ollman

“The Board decided to hold interest rates steady this month,” Mr Lowe said.

“This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook.”

He pointed out that inflation had passed its peak but the levels were still too high.

“Inflation is still too high and will remain so for some time yet,” he noted in his statement.

He said that high employment rates and wage growth could force his hand to raise rates again.

“The Board remains alert to the risk that expectations of ongoing high inflation will contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment,” he said.

“Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”

Mr Lowe also vowed the nation’s central bank “will do what is necessary” to get inflation to its target band of two to three per cent.

The Reserve Bank of Australia (RBA) has spared Australians from more mortgage pain, for now. Picture: Brendon Thorne/Bloomberg

Graham Cooke, head of consumer research at Finder, said although the decision was cause for celebration, Australians should still brace for what comes next.

“The RBA repeatedly states that its intention is to get inflation all the way to the target rate of two to three per cent and we aren’t there yet,” he said.

“While homeowners have been given a break this month, they should buckle up for further hikes this year”.

Similarly, Paul Ryan, senior economist at property analysis firm PropTrack, said house and unit prices had risen which could point towards future rate rises.

Nationally, property prices have risen by 2.3 per cent so far this year, and their values surged “further” in June.

“The RBA held the cash rate target steady today. Nevertheless, the RBA signalled that more tightening may be needed to rein in inflation, with many expecting another hike – the 13th since May 2022 – to come as early as next month,” Mr Ryan said.

“The RBA judged that recent data on the labour market and inflation was in line with its expectations and opted to wait for additional data on inflationary pressures and productivity growth, in particular.

“More tightening is expected to be needed to bring inflation back to the RBA’s target, but rates are close to their peak, which is good news for the housing market.”

Economists were torn about whether homeowners are in for more mortgage pain. Picture: Newscorp- Daily Telegraph / Gaye Gerard

Only one of Australia’s biggest four banks predicted a pause was likely for the month of July.

The Commonwealth Bank (CBA) was expecting a pause for Tuesday’s decision but has also predicted an August hike.

They think one more rate rise is likely next month, in August, at 25 basis points.

But after that, they expect the rate will only go down, with 4.35 per cent being its terminal rate.

“Inflation is heading in the right direction, albeit it remains too high and concerns around inflation expectations and indexation remain in place,” the bank wrote.

“The RBA is attempting to walk a fine line between bringing inflation down and holding onto gains in the labour market.”

ANZ, Westpac and NAB all incorrectly forecast a 25 basis point increase for Tuesday.

Bill Evans, Westpac’s chief economist, said there was a “considerable risk” the rate would go up again in August, despite the pause.

“The knock-on effect of these hikes is that it’s likely to push back the start of interest rate cuts,” he wrote.

“We’re now pencilling in May 2024 for the first cut, pushed back from our previous expectation for February.”