Reserve Bank holds rates steady granting borrowers early Christmas gift

While household borrowers were spared at the central bank’s final meeting of the year, further rate pain could be right around the corner, economists warned.

Battling borrowers have received an early Christmas gift from Reserve Bank governor Michele Bullock, but economists have warned the reprieve may be short-lived.

At its final board meeting of the year on Tuesday, the central bank opted to keep rates on hold at 4.35 per cent, after tightening the screws on mortgagors at its Melbourne Cup Day determination in November.

The RBA governor warned in a statement that further tightening could be required should local price pressures be more stubborn than the central bank had forecast.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” Ms Bullock said.

An interest rate hold was widely expected with economists almost unanimously forecasting the RBA would grant borrowers reprieve, while money markets were pricing a near zero chance of a hike to 4.6 per cent.

The question for investors and analysts now turns to whether the central bank has done enough to tame price pressures, or if fresh inflation data for the December quarter, due in early February, could force a 14th rate hike at the next board meeting.

Mortgagors battling with the increase to repayments in the last 20 months have received much-needed reprieve just weeks before Christmas. Picture: NCA NewsWire / Max Mason-Hubers

The RBA is currently battling to return inflation, which peaked at 7.8 per cent in December 2022 but has fallen to 4.9 per cent in October, back to its 2 to 3 per cent target band.

Ms Bullock said “[h]igher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy”.

“Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market,” she said.

But continued uncerties about the Chinese economy and inflationary pressures for the labour-intensive services sector clouded the outlook, the governor said.

“While there have been encouraging signs on goods inflation abroad, services price inflation has remained persistent and the same could occur in Australia,” she added.

Recently released data showing a slight rise in unemployment, dwindling job advertisements, lower than expected inflation and weaker retail sales all point to a softening in economic activity, which were judged to be “broadly in line with expectations”.

However, the statement also acknowledged that this data was “limited” and “did not ... provide much more information on services inflation” .

Household borrowers with variable rate loans have seen their repayments surge as a result of the RBA’s aggressive monetary tightening. Photo by: NCA Newswire / Gaye Gerard

Sean Langcake, head of macroeconomic forecasting at Oxford economics said borrowers could anticipate fresh rates pain at the RBA’s next meeting, due February 6.

“There are still plenty of warning signs around labour cost growth and services inflation,” Mr Langcake said, pointing to the RBA’s statement. 

“We still think the next move is up and expect to see a rate hike in February when the new board has the December quarter CPI data to scrutinise.”

NAB economists are also forecasting a final rate hike when the RBA board convenes for its inaugural meeting of 2024, while AMP chief economist Shane Oliver said the odds of a rate hike “remained high” at approximately 40 per cent.

However, Commonwealth Bank head of Australian economics Gareth Aird said the most recent inflation data was more positive than the RBA was indicating and another cash rate hike was unlikely.

“Behind closed doors we suspect the RBA Board is more encouraged by the latest inflation data than the Governor is letting on today,” Mr Aird said.

“We don’t anticipate any further increases to the cash rate.”

The prospect of further tightening comes as the RBA conceded last month that household borrowers were already experiencing a “painful squeeze”.

Borrowers with an average-sized variable rate loan of $585,000 are already paying more than $1500 extra every month than they were before the RBA started its current tightening cycle, according to loan comparison website Compare the Market.

Treasurer Jim Chalmers said the progress made on lowering inflation had become “very clear”. Picture: NCA NewsWire / Martin Ollman

Speaking after the decision, Treasurer Jim Chalmers welcomed the RBA’s decision, adding that while progress had been made with lowering inflation, he said the government was “not getting carried away”.

“We know that people are still doing it tough, we know that people are finding it difficult to make ends meet,” Dr Chalmers told reporters in Canberra.

“But if you look at the recent data and you look at the recent commentary, it is very clear now that we are making welcome and encouraging progress in this fight against inflation.”

Shadow treasury spokesman Angus Taylor said despite the hold on interest rates, it would still be a “grim Christmas for many Australians”.

“Today’s decision hasn’t made life any easier for hard-working Australians with a mortgage,” Mr Taylor said.

Fresh GDP figures to be released on Wednesday, which are expected to show the economy expanded by 0.4 per cent in the September quarter according to consensus estimates, will provide a further indication of how the country is weathering the most aggressive tightening cycle in decades.

Originally published as Reserve Bank holds rates steady granting borrowers early Christmas gift