RBA keeps cash rate at 4.35pc and offers clues about when households will see cuts

The Reserve Bank decision to keep the cash rate on hold at 4.35pc offers clues about what needs to happen in order for homeowners to see repayments fall.

The Reserve Bank has kept the cash rate on hold at 4.35 per cent and dampened hopes of rate cuts for mortgage holders in the months ahead, warning that inflation is still too high.

In a statement following the decision, the RBA board said despite recent progress on lowering inflation, which fell faster-than-expected in the December quarter to 4.1 per cent, it remained high and would be “some time before it is sustainably in the target range”.

RBA governor Michele Bullock said on Tuesday that the bank will not cut the cash rate until it was confident that inflation will return to its target band of 2-3 per cent and stay there, adding that it did not want the risk of having to lift interest rates after cutting.

“We need to be convinced that its (inflation) moved enough and we’re convinced that it’s going to get there and it’s going to stay there. I can’t give you a time line on that,” she said.

“We’re confident … we will get there. And if we’re getting there and we look to be on track to get sustainably in the band, then we might be able to think about interest rate cuts. But we’ve got to be confident about that.”

The RBA did not rule out slugging households with a further rate rise if it was concerned that inflation would not return to target within a “reasonable time frame”.

“The point is that we need to make sure that we don’t have to backtrack on inflation. That inflation doesn’t get away,” Ms Bullock said. “What we’re looking for is data which convinces us and helps us to be reassured that inflation is coming back to target within that time.”

The RBA also revised its inflation forecasts on Tuesday, predicting consumer price growth to fall to 3.3 per cent by June and only reaching its 2-3 per cent target band by December 2025.

CBA head of Australian economics Gareth Aird said that the RBA is likely to keep the door open for rate hikes as part of its communication strategy with Australian businesses and households.

“The RBA will likely wish to keep the tightening bias for a little longer for their communication strategy,” he said.

“The governor and deputy governor do not just communicate with market participants. They communicate with households, businesses and policymakers.”

Mr Aird expects it will take more than just weak economic growth for the RBA to entertain the idea of rate cuts.

“The unemployment rate will likely need to rise a little more quickly than the RBA anticipates and inflation will need to fall a little faster. We expect both of those outcomes to transpire and we remain comfortable with our base case.”

Financial markets remain confident that rates have still peaked — with two 25-basis-point cuts expected in 2024 – the first in August and another in November to see the cash rate hit 3.85 per cent.

Analysis from Rate­City.com.au shows that a single 25-basis-point cut would cut about $76 a month for a $500,000 loan, $113 a month for a $750,000 loan, and $151 monthly for a $1m loan.

A second cut would see payments reduced by $151 a month on a $500,000 mortgage, $226 monthly on a $750,000 loan, and $302 a month on a $1m loan.

Any mortgage relief will however pale in comparison to how much repayments have rocketed since the first rate rise this cycle in May 2022.

On the average $500,000 loan payments have increased $1210 a month and $2420 on a $1m loan.

Optimism about rate cuts by pundits has changed since then and was heightened in the past week after inflation in the December quarter fell faster than expected to the lowest level in two years of 4.1 per cent, exceeding predictions by the central bank.

AMP chief economist Shane Oliver said that the combination of weaker growth and a faster fall in inflation than the RBA currently expects will ultimately force its hand in cutting rates this year.

“We continue to see it cutting rates from mid-year with three 25bps rate cuts by year end, taking the cash rate down to 3.6 per cent by December,” he said.

“By the May meeting there is a good chance it will have moved to an easing bias. But it’s worth noting that the road to rate cuts will likely be a bumpy one.”