The Reserve Bank of Australia kept the cash rate on hold for the sixth consecutive meeting, continuing its ‘wait-and-see’ approach, after last week’s CPI results landed broadly as forecast.

Headline inflation rose from 3.6 per cent to 3.8 per cent annually, in line with RBA forecasts, however, trimmed mean inflation, the central bank’s preferred measure, fell for the sixth consecutive quarter, despite coming in marginally higher than expected by the RBA.

While the Board is once again refusing to rule anything in or out, Governor Bullock confirmed that a rate cut in the near future was highly unlikely, based on current data.

RateCity.com.au research director, Sally Tindall, said:

“Last week’s inflation figures handed the RBA a get-out-of-jail-free card for this week’s meeting, but there’s still a long road ahead for the central bank and the country.”

Trimmed mean inflation might have fallen for the sixth consecutive quarter, but at an annual rate of 3.9 per cent, it’s above the RBA’s own forecast and still a long way from its target of 2.5 per cent."

RBA hold decision unlikely to boost housing demand

CoreLogic's Research Director, Tim Lawless said that with the quarterly rate of core inflation easing back to 0.8% in the June quarter, in line with the RBA’s May forecast and down from 1.0% in the March quarter, much of the pressure has come off the RBA to lift rates.

He further said:

"A slowdown in job growth and a subtle lift in the unemployment rate were also at play in keeping rates on hold.

Although a stable interest rate decision is seen as a positive for borrowers and housing more broadly, we aren’t expecting today’s outcome will have a material influence on housing trends."

Lawless pointed out that while stable rates and lower inflation should help to lift consumer sentiment, which has historically shown a close relationship with property sales, the August hold decision may not be enough to see that rise in consumer sentiment flow through to housing market activity.

Recent growth in property prices has had more to do with low supply, tight rental conditions and demographic factors than sentiment through the housing upswing to date.

Clearly, many of these factors are now losing their potency, with the trend rate of home sales easing as affordability becomes more challenging, migration slows and momentum leaves the upswing in rents.

Lawless also commented:

"Even if sentiment lifts, an improvement in affordability barriers or strengthening in household balance sheets isn’t likely until interest rates start to fall.

Similar to the volume of home sales, housing values have trended higher in the face of high interest rates and cost of living pressures.

Although the growth trends are diverse from city to city, the pace of gains is clearly slowing at the macro level.

On a rolling quarterly basis, CoreLogic’s national Home Value Index (HVI) has slowed from 3.3% over the June quarter last year to 1.7% over the three months ending July 24."

Outlook

Lawless highlighted that while the RBA Board is leaving their options open if the inflation trajectory continues to ease, the next movement in interest rates should be downwards.

He added:

"Whether this will be enough to revitalise the housing growth cycle is open for debate. There is a possibility that affordability pressures and, eventually, a housing supply response, will keep a lid on price growth even as rates come down.

The timing of a rate cut remains uncertain and dependent on the flow of data, especially inflation and labour force outcomes.

The earliest forecasts have a rate cut pencilled in for November, while market pricing is pointing to February next year."

Meanwhile, Ms Tindall pointed out that there’s no guarantee that we’re not having another hike.

She said:

"Plenty of economists expect the next change to the cash rate will be down, not up, and while this may well eventuate, if you’ve got a mortgage, put the idea of rate cuts out of your head and plan for another hike, just in case.

Getting a rate hike you hadn’t planned for isn’t quite the same as getting a cut you weren’t expecting. It can have disastrous consequences for those already living in the red.

You can do this by asking your bank for a rate cut. If they agree, keep your monthly repayments exactly the same, that way you’ll have immunity against a hike, should one eventuate. It’s that easy."

How do other countries compare?

A growing list of central banks in other key economies have begun cutting official rates in recent months including two cuts by the Bank of Canada in June and July, one cut by the European Central Bank (ECB) in June, one from the Bank of England last week, and while the US Fed kept rates on hold at its meeting last week, it did signal that a cut is on the cards potentially as soon as September.

While these jurisdictions are further advanced in their battle with inflation, it’s also important to note Australia is unique in terms of the number of mortgages on variable rates and the amount of debt mortgagors have.

Official rates around the world:

Source: RateCity.com.au. *Harmonised index of consumer prices (HICP). ^

ECB rate is the deposit facility rate. The ECB rates on the main refinancing operations and marginal lending facility are 4.25% and 4.50% respectively. 

Note: cash rate can be referred to as policy rate or official rate in other countries.

Big four banks confident the next move will be down

Following last week’s CPI results, the big four bank economic teams have re-confirmed they expect the next move from the RBA will be down, not up, however, there is a difference of six months in their projections for the timing of the RBA’s next move.

Both CBA and Westpac expect the first cut will be in November of this year, while ANZ and NAB predict it will be in 2025, in February and May respectively.

Current big four bank cash rate forecasts:

On a $600,000 mortgage a six-month difference in the timing of the first cut is significant.

RateCity.com.au research shows that if CBA and Westpac’s forecasts are correct and there are three cuts within the next 12 months, the average owner-occupier with $600,000 debt today would see their monthly repayments drop by $271.

However, if NAB’s forecast is correct, and there is just one cut in the next year in May 2025, their repayments would only drop by $91 within the next year - assuming in both cases - banks pass cuts on in full.

Potential impact of big bank forecasts on a borrower’s finances

Based on a $600,000 loan with 25 years remaining

Source: RateCity.com.au.

Notes: based on an owner-occupier paying principal and interest with 25 years remaining on their loan.

Assumes hikes come in the last month of each quarter unless specified. Assumes rate cuts are passed on in full.

RateCity.com.au research director, Sally Tindall, said:

“There’s no guarantee we’re going to get there without another hike.

Plenty of economists expect the next change to the cash rate will be down, not up, and while this may well eventuate, if you’ve got a mortgage, put the idea of rate cuts out of your head and plan for another hike, just in case.

Getting a rate hike you hadn’t planned for isn’t quite the same as getting a cut you weren’t expecting. It can have disastrous consequences for those already living in the red.

You can do this by asking your bank for a rate cut. If they agree, keep your monthly repayments exactly the same, that way you’ll have immunity against a hike, should one eventuate. It’s that easy,” she said.