At last, Sydney’s heavily indebted home borrowers have reason to smile

At last, Sydney’s heavily indebted home borrowers have reason to smile.

Tuesday’s decision by the Reserve Bank of Australia to cut official interest rates by 0.25 of a percentage point is especially welcome in a city where the high cost of property means many households live with huge mortgages.

With Australia’s economic growth rate anaemic, and the consumer price index within the RBA’s target band of between 2 and 3 per cent for the past six months, the case for a rate cut was compelling.

Anthony Albanese’s election timing will be influenced by Michele Bullock’s decision to cut ratesCredit: Michaela Pollock

A statement by the bank’s board, accompanying the decision, said inflationary pressures had eased “a little more quickly” than expected. It also noted private demand in the economy had been weak and that wage pressures had eased. The RBA also cut its forecast for economic growth this financial year from 2.3 per cent to 2 per cent – well below the long-term trend.

The rates decision begins to reverse the interest rate spike of 2022 and 2023 that followed an inflationary surge triggered by the disruptions of the pandemic and Russia’s war on Ukraine. Mortgage holders were hit with 13 hikes in just 18 months – the sharpest tightening of the interest rate screws in at least 30 years.

The RBA has repeatedly compared its efforts to lower inflation without triggering a recession and high unemployment to navigating a “narrow path.”

While risks remain, Tuesday’s interest rate cut suggests the bank has, so far, managed to strike the right balance.

Despite the rapid increase in rates in 2022 and 2023, mortgage arrears and defaults have been less prevalent than expected and unemployment has remained low by historical standards.

In NSW, the jobless rate in December was just 3.8 per cent, a heartening result given the years of cost pressures endured by the state’s households and businesses.

The rate cut will deliver a timely boost to the NSW economy, which is forecast to grow by a sluggish 0.75 per cent this year.

If the downward trend in inflation continues, borrowers will likely get more interest rate relief this year. But the RBA board warned that is not assured; its statement emphasised “upside risks” to the inflation outlook.

“While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” it said.

It also drew attention to “significant” uncertainty about the outlook for the global economy.

It is possible widespread tariffs on US imports mooted by President Donald Trump will stoke global inflation pressures.

Recent economic challenges have underscored the value to Australia of having an independent central bank; it is hard to imagine politicians taking the difficult interest rate decisions needed to curb the recent inflationary spiral.

Attention will now inevitably shift to whether interest rates will be cut again when the RBA board next meets on March 30 and April 1.

Politicians should refrain from giving free advice on interest rate policy and let the RBA do its job.

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