Borrowers likely to wait a year for relief after RBA keeps rates on hold

Mortgage holders may wait at least a year for relief after the Reserve Bank kept interest rates on hold while admitting it may have misjudged the extent of inflation pressures across the economy.

At its second-last meeting of the year, the bank held interest rates steady at 3.6 per cent and signalled inflation will spike in coming months as a mixture of one-off and more enduring price pressures lift the cost of living for consumers and businesses.

The Reserve Bank said the jobs market remains a mixed picture as it kept interest rates on hold.Credit: Jessica Hromas

At a press conference following the decision, RBA governor Michele Bullock said temporary factors such as higher international travel costs and a big spike in council rates had pushed inflation above the bank’s 2 to 3 per cent target range, but admitted it was possible the bank had miscalculated the strength of overall price pressures.

“We are alert to the risk that we have misjudged the gap between demand and supply in the economy,” she said. “It is possible there are no more rate cuts, possible there are more.”

The bank revealed it expects headline inflation to hit 3.7 per cent by the middle of next year. It had fallen to 2.1 per cent in June.

Inflation is not expected to be back within the RBA’s 2 to 3 per cent target until 2027.

Bullock said inflation would need to fall back well within the target for the bank to be satisfied. “[Inflation] just below three [per cent] is not good enough for the board,” she said.

Neither a rate cut nor a rate hike were considered at the latest meeting, Bullock said, with the board judging it was “appropriate to remain cautious” as the impact of previous interest rate decisions continues to flow through.

In September, annual trimmed mean inflation – which strips out the impact of the biggest price movements and is a metric closely watched by the RBA – hit the top of the bank’s 2 to 3 per cent target band.

Annual headline inflation – a broader measure of price pressures – for September clocked in significantly higher than the bank had forecast at 3.2 per cent, largely reflecting a jump in electricity prices as government rebates ended across several states.

Following the decision, Treasurer Jim Chalmers acknowledged people were still under financial pressure but said Australians had made “remarkable” progress.

“While millions of Australians would’ve wanted to see more rate relief, this decision was widely anticipated and widely expected by markets,” he said. “Inflation is much lower than we inherited ... debt is down, real wages are growing, unemployment is low.”

During question time, Opposition Leader Sussan Ley said Labor had killed the possibility of a Christmas rate cut.

“Australians have just been denied a Christmas rate cut because of Labor’s reckless spending,” she said, before citing a St Vincent de Paul release to add that “32 per cent of households are going without food or skipping meals” and that in some suburbs “90 per cent are struggling to pay their mortgage”.

While the unemployment rate in September was higher than economists had expected, jumping to 4.5 per cent, the bank said other signs suggested the labour market continued to be on the tight side.

The underemployment rate – the share of people wanting to work more hours – has fallen over the past year, and the share of people quitting their jobs has picked up. A higher quit rate suggests workers are more confident about their prospects of finding another job.

The bank’s latest forecast is for unemployment to hold steady at about 4.4 per cent over the next two years.

Moody’s Analytics’ head of Australian economics, Sunny Kim Nguyen, said the Reserve Bank’s cuts earlier this year had fed into the inflation pressures now afflicting the building sector. She said the bank was now in a holding pattern, noting the political damage if it had to admit previous rate settings were wrong.

“The RBA needs to see inflation falling convincingly – actually falling, not just forecast to fall – before it moves again. It is highly unlikely to hike again, given the political and communication costs of reversing course,” she said.

A pick-up in consumption has helped the country’s economic growth to recover, but the RBA warned the outlook remains uncertain.

The bank also noted the Australian housing market was continuing to strengthen in a sign recent interest rate cuts were flowing through. It also said the government’s 5 per cent deposit scheme, which came into effect in October, would likely “put at least some further upward pressure on housing credit and price growth.”

NAB chief economist Sally Auld said mortgage holders should be prepared to wait for further rate relief.

“The RBA’s delivery of a soft landing still stands, but the combination of trend GDP growth, full employment and core inflation sustainably in the target band now takes longer to achieve,” she said. “Against that backdrop, the RBA will be in no hurry to adjust rates in any direction.”

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