Key takeaways
The Reserve Bank Board left the cash rate unchanged at 4.1% at the August Board meeting.
The key explanation was a desire to take more time to assess the impact of the increase in rates to date and the economic outlook.
The Board also noted that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame.“
The Reserve Bank has left the cash rate at 4.10 per cent, announcing a pause for the second meeting in a row, and third time this year.
The key explanation was a desire to take more time to assess the impact of the increase in rates to date and the economic outlook.
The Board also noted that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame."
Households, however, will be feeling the ‘painful squeeze’ of the RBA’s previous 12 cash rate hikes, with the majority of variable borrowers still yet to see their monthly repayments rise as a result of the last hike in June.
This is because there is typically a 2 – 3 month lag on when the cash rate goes up, and when that extra money comes out of borrowers’ bank accounts.
Experts commentary:
RateCity.com.au research director Sally Tindall, said:
“The RBA has hit the pause button again in a bid to get the balance right.
With inflation, retail trade and household deposits now all coming down, the data has finally swung in its favour, giving the Board a much-needed opportunity to take stock.
The RBA is well aware that most variable borrowers still haven’t paid for rate hike number 12, so there’s still more pain to come, even without another rise.
While it’s impossible to say at this stage whether this will be the end of the hikes, the RBA can at least use this next month to assess whether it’s possible to rein in inflation without having to tighten the screws any further.
The cash rate might be on hold however borrowers should do anything but sit tight.
This second pause is a fantastic chance for borrowers to measure up their home loan rate against the pack.
Your bank might tell you you’re on a sharp rate but that doesn’t necessarily make it a fact.
The RateCity.com.au database shows there are still five lenders offering variable rates under 5.5 per cent. That’s a far cry from what the big four banks are currently offering new customers.
Borrowers should also spend this month, prepping their budgets for at least one, if not two more rate rises. If that number doesn’t fit in your budget, start making changes so that it does."
Commentary by CoreLogic Research Director, Tim Lawless
The RBA’s decision to hold the cash rate at 4.1% will be considered a welcome reprieve for many, but it doesn’t necessarily signal an end to the rate hiking cycle.
Considering the RBA is working with a mixed bag of key data sets that guide their decision making, another rate hike down the track remains a possibility.
On one hand, we have a lower than expected inflation outcome for the June quarter supporting the hold decision, with headline inflation lower than RBA forecasts at 0.8%, the lowest quarterly change since Q3 2021.
Retail sales posted a broad based decline in June, down 0.8%, and economic conditions weakened with GDP growth of just 0.2% in Q1.
Regarding the housing market, the RBA previously expressed concerns about asset value growth, but those worries may have diminished as we’ve seen price growth decelerate in the past two months.
On the flipside, we have persistently tight labour market conditions, with unemployment at just 3.5% alongside strong jobs growth, low productivity growth, and wages that are rising at well above the decade average.
Although inflation is coming down, services inflation is ‘sticky’, with annual growth tracking at the highest annual level of growth since 2001.
Although rates remained on hold this month, it’s not to say there won’t be another hike down the track. We will see more detail on the RBA’s economic perspectives when the quarterly Statement on Monetary Policy is published on Friday, but considering the aforementioned opposing trends, another rate hike can’t be dismissed.
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Highlighting the uncertainty ahead, some economists have already called a peak in the rate hiking cycle, others believe there will be one more hike in the coming months, while others are pricing in two more rate hikes on the basis of tight labour market conditions potentially feeding wages growth and keeping inflation higher for longer.
The range of cash rate forecasts reflects the sheer uncertainty in the economy.
The RBA itself has once again left the door open for rate hikes, noting some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but this depends on the trajectory of inflation and labour market outcomes.
For the housing sector, the decision to hold interest rates over the past two months is positive news.
A growing expectation that interest rates have peaked, or are near a peak, should help to lift consumer sentiment from the recession-like lows that have persisted over the past nine months.
Consumer confidence and housing activity go hand in hand.
Generally, when sentiment is low, home sales are low and vice versa; so, any lift in sentiment is likely to be accompanied by a rise in active buyers and sellers.
Cash rate commentary from Canstar’s Editor-at-Large and money expert, Effie Zahos:
“We are towards the end of the latest tightening cycle so the Reserve Bank cash rate decision in August will be a very close call.
While there are enough reasons to justify another rate hike there are just as many for the Reserve Bank to hit pause again.”
The current RBA Governor, Philip Lowe, has two more cash rate decisions to preside over before handing over the reins to Michele Bullock on 18 September.
Given inflation is actually falling faster than the Reserve Bank forecasted, bank deposits have fallen for the first time in two years so the more prudent approach would be to keep the cash rate on hold in August.
The next monthly Consumer Price Index Indicator data will be released on 30 August.
If this shows a reverse in the downward trend then Governor Lowe does have another opportunity to increase the cash rate one final time before Michele Bullock takes over.
Canstar’s research shows that variable rates continue to move upwards.
There are now only 18 rates below 5.50 percent on Canstar's database, a drop from 48 just four weeks ago. At this rate, it won’t be long till the cheapest home loan has a six in front of it.
Interest rate hikes have increased the banks' cost of capital, so they are closing the gap between new and existing customer rates to protect their forward earnings.
Reserve Bank data shows the gap in interest rates between existing customers and new customers has fallen from 0.51 percentage points in December 2022 to just 0.37 in May.
Competition has now moved from attracting new customers to retaining existing customers.
It pays to do an interest rate check with your existing lender. If they don’t come to the party then you need to look elsewhere.
Switching a $500,000 loan with a 30-year loan term from the average variable rate for existing customers at 6.98 percent to the lowest variable rate of 5.44 percent could cut repayments by $500 per month or $6,000 per year!”
