RBA interest rate moves pay off, but clouds remain for home loans

Interest rates are on hold again, and the period of peak pain may have passed, but households and businesses have much to think about.

The Reserve Bank of Australia appears to be walking the tightrope between rate rises and economic Armageddon like a skilled aerialist, but what does it mean for your mortgage?

Tuesday’s decision to keep the official interest rate at 4.1 per cent, on hold for the third consecutive month, adds weight to growing expectations that rate rises are over, but it’s still wise to expect the unexpected.

While many households and businesses are hurting after a dozen rate rises since May 2022, and some have slipped into bankruptcy, the RBA’s self-proclaimed “narrow path” to avoiding a recession has seemed wider than expected.

Reserve Bank governor Philip Lowe has led his last board meeting. Picture: NCA NewsWire / Martin Ollman

Tuesday’s rate decision was the final board meeting for outgoing RBA governor Philip Lowe, whose job was one of the high-profile casualties of the RBA’s rapid-fire rate rises that followed its earlier message that interest would not increase until 2024.

Despite those criticisms, Australia’s efforts in controlling inflation have gone better than many other nations and our cash rate is lower than many Western nations.

Take Turkey, for example. Its annual inflation spiked to 59 per cent in August, and its central bank recently lifted interest rates from 17.5 per cent to 25 per cent. Ouch.

The Bureau of Statistics monthly inflation indicator for July was a lower-than-forecast 4.9 per cent for the past 12 months, well below last December’s figure of 8.4 per cent.

Wages growth has not spiralled as was feared, and the economy may avoid a technical recession – although that will be made clearer by GDP figures due on Wednesday.

Rather than blindly applaud the RBA for a job well done, we should all give ourselves a pat on the back for doing what it wanted us to do – slow down our spending and price rises without causing an economic collapse.

Interest rates and the economy remain finely balances, so borrowers need a plan B. Picture: iStock

As for borrowers, both fixed and variable, there are still challenges ahead including:

• The mortgage cliff is still playing out, as almost 900,000 fixed-rate loans come off their low interest rates this year and revert to variable rates about 4 per cent higher.

• Rate rises have a lagging effect and that is still to fully impact retailers and other businesses, where sales have slowed sharply and could lead to more job losses.

• What borrowers will do when their savings accumulated during the pandemic run out and they still have to find an extra $1200 to repay s $500,000 mortgage, compared to what it cost in early-to-mid 2022.

A growing group of economists now expect that the next move for rates will be lower, some time in 2024, but borrowers should expect the unexpected, and have backup options in place to cope with more potential rises.

Economic, political and other events can quickly derail forecasts and plans. Covid, anyone?