Reserve Bank leaves interest rates on hold at 4.35 per cent in Christmas reprieve

The Reserve Bank has kept the cash rate on hold at 4.35 per cent in relief to millions of Australians who have seen repayments soar by $25,000, but it could only be temporary.

The Reserve Bank has delivered Christmas reprieve by leaving the cash rate on hold at 4.35 per cent in welcome news for households who have shelled out an extra $25,000 since the start of the relentless hikes last year.

The widely expected decision from the central bank follows a 25 basis points increase in November on concerns homegrown factors are keeping inflation higher than it is willing to tolerate.

The RBA has implemented 125bps worth of hikes this year and 425bps since its first rate rise in May 2022, which has seen mortgage repayments grow by $1210 on a typical $500,000 loan, $1815 on a $750,000 loan and surge by $2420 for borrowers with $1m owing to the bank, according to RateCity.com.au.

Tuesday’s pause could turn out to be temporary, however, with the RBA saying in its November minutes it will increases rates again if economic data suggested inflation takes longer to return to target than.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks,” RBA governor Michele Bullock said in her post meeting statement.

“In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”

February is touted as the most likely month the RBA will move to deliver a potential final rate hike, but economists are evenly split as to whether the country’s central bank is finished with its monetary tightening policy.

Ms Bullock warned last month that the country’s inflation problem is increasingly “homegrown” as imported cost pressures continue to wane. She noted prices for labour-intensive services including trips to the dentist, hairdresser or restaurant had continued to rise briskly.

The RBA has said that Aussies getting haircuts are keeping inflation higher. Picture: John Feder.

Her concerns about inflation are expected to take a back seat at this afternoon’s meeting after a sharper than expected decline in inflation from 5.6 per cent in September to 4.9 per cent in October gave cover for a hold despite double-digit growth for power prices.

Analysis by RateCity.com.au shows the average borrower with a $500,000 loan at the start of the hikes will have paid an estimated $24,598 more in interest charges in the twenty months between May 2022 and December 2023. This assumes the borrower has not refinanced or renegotiated their loan in this time.

RateCity.com.au research director Sally Tindall said Australians should not let their budget go rogue this summer because a prolonged spell of elevated spending could see the RBA lift again.

“Covid was tough on many families, but 2023 has been even harder financially for a lot of Australians who have had their back up against the wall due to the RBA hikes,” she said.

“The cash rate is a hammer not a chisel. Some households have slipped through relatively unscathed while others have moved from physical lockdown to financial lockdown.”

Economic teams from all four big banks believe the cash rate will remain on hold with CBA, Westpac and ANZ saying the cash rate has now peaked. NAB is the only bank predicting one more hike early in the New Year. The four expect Australians will see rate cuts by the end of 2024.

PropTrack senior economist Eleanor Creagh said while October’s inflation reading was above the RBA’s target, it continued the downward trend, which has seen inflation fall from a 30-year high in December 2022.

“Conditions are expected to continue to soften as the full impact of monetary tightening to date is yet to be felt and inflation is likely to continue moving lower as a result,” she said.

“It’s likely the cash rate has peaked in this current tightening cycle, although should inflation data indicate inflation is returning to target at a slower pace than currently expected the risk of another lift in February 2024 remains.”

Economists have also said the government’s immigration policies are fuelling demand-driven inflation in a range of goods and services including rents with 500,000 arrivals in the past year.