Rate cut on table but RBA warns inflation war not over

The Reserve Bank has held the cash rate at 4.35pc and doused hopes of imminent relief for struggling mortgage holders.

Michele Bullock at a news conference following the rates decision on Tuesday. Picture: NCA NewsWire / Dylan Coker

The Reserve Bank has deflated any hopes of imminent mortgage relief by declaring further hikes “cannot be ruled out” and warning the nation’s inflation challenge is not over, as it held rates steady at 4.35 per cent.

In a statement that triggered investors to pare back – but not eliminate – expectations for rate cuts in the second half of the year, the RBA board said “while recent data indicate that inflation is easing, it remains high”.

“The board expects that it will be some time yet before inflation is sustainably in the target range,” it said. “The path of interest rates that will best ensure that inflation returns to target in a reasonable time-frame will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”

Jim Chalmers said the decision by the RBA board to hold rates for the second consecutive meeting would come as “welcome relief for Australians who are already under the pump” but warned it was “not mission accomplished”.

“This is a decision which will be welcomed right around the country,” the Treasurer told parliament. “There are encouraging signs in our economy. Inflation is moderating. But they recognise, as we do, that inflation is still too high in our economy … People are still under pressure.”

At a news conference following the rates decision, RBA governor Michele Bullock said she understood that mortgage holders were “sweating on this” and that “people are doing it tough”.

“A big reason for that is inflation,” Ms Bullock said. “That’s why it’s really important to get inflation down. We have made good progress. Absolutely. We’ve made good progress. But there is more work to do; the job’s not done.

“It might be that there has to be more rate rises, but there might not be.”

As mortgage holders look for relief from cost-of-living pressures, the Albanese government on Tuesday introduced amended legislation to redistribute the benefits of the stage three tax cuts away from high-income earners, and to lower- and middle-income households.

Some economists have warned of an additional pressure on ­inflation as a result of the changes, but Ms Bullock said Labor’s package represented the “same amount of money being handed to households”.

“It is distributed slightly differently, but we don’t think it has any implications for our forecast,” she said.

Analysts had predicted a more “dovish” tone from the RBA in the wake of a soft inflation report, which showed a larger than expected drop in price growth to 4.1 per cent in the year to December, from 5.4 in the previous quarter.

EY chief economist Cherelle Murphy said the message from the governor was clear: “despite the mortgage pain being felt by many in the community, the Reserve Bank will remain vigilant in the fight against inflation”.

The warning that borrowers should not rule out further rate hikes came even as the bank in its updated set of economic forecasts slashed its inflation forecasts for 2024, predicting consumer price growth would fall from 4.1 per cent in December to 3.3 per cent by June, before easing only slightly to 3.1 per cent by the end of the year. That compared with the bank’s previous prediction that inflation would be at 3.9 per cent by mid-2024, and 3.5 per cent by December.

Interest rates were at “restrictive” levels, and were dragging more on growth and spending than anticipated, the quarterly Statement on Monetary Policy said.

“The pressure on household budgets from declines in real incomes over the past couple of years is expected to weigh on consumption, particularly in the first half of 2024,” it said.

Attacks on vessels in the Red Sea and restricted access to the Panama Canal had sent shipping costs higher and forced the diversion of some ships to longer, costlier routes, the RBA noted.

“While this poses some upside risks to tradeable goods inflation, the increases to date have been small relative to those seen during the pandemic,” the SoMP said.

Despite the more optimistic outlook, the SoMP warned that inflation remained too high, particularly in prices for services such as hairdressing, dining out and dentistry.

The RBA said the surprisingly soft inflation data for 2023 was lower than expected three months ago, and showed “further progress in the decline in inflation from its peak in late 2022”.

“Nevertheless, the rate of inflation remains well above target,” the SoMP said. “Services price inflation in particular remains high, consistent with the assessment that that there is excess demand in the economy and strong domestic cost pressures.”

The persistence of services inflation explains a much shallower flight path for inflation through 2025, with consumer price growth only dipping below the top of the bank’s 2-3 per cent target range by late next year, before reaching 2.6 per cent by mid-2026.

With unemployment still at a relatively low level of 3.9 per cent – well below the 5 per cent leading up to the pandemic, but up from multi-decade lows of about 3.5 per cent – the RBA believes conditions in the labour market were continuing to ease, “but remain tight”.

Reinforcing the growing confidence among central bankers globally that they will manage a “soft landing” for economies, the jobless rate is projected to reach 4.2 per cent by June, and peak at only 4.4 per cent a year later.