Interest Rates Hold for Third Month: Implications for Market

The Reserve Bank has again opted to keep the cash rate on hold at 4.1 percent, for the third month in a row, as Philip Lowe passes on his final chance to use monetary policy in the fight against inflation.

“Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” said Dr Lowe.

“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”

July figures showed that inflation had eased yet again, however service based inflation remained sticky, with rising rents a driving factor.

Housing contributed largely to July’s annual overall CPI increase of 4.9 percent, with housing increasing 7.3 percent in the 12 months to July, according to the ABS.

In the board’s cash rate decision today, the RBA named returning inflation to its target range of 2-3 percent as their top priority.

Dr Lowe iterated that high inflation can hurt household budgets, erode savings, and would be far more expensive to reduce later on.

He also noted that despite sticky services inflation, it has been responding appropriately to monetary policy.

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.

“Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed,” said Dr Lowe.

But the good news didn’t come without a cautionary warning. Dr Lowe pointed to the global economic outlook as a reason not to rule out further rate rises.

“There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.

“There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight,” said Dr Lowe.

He also pointed to household consumption as a determinant of inflation, noting that some households are benefitting from extra wealth, generated from higher house prices, with more cash to spend. While on the other hand, Chinese property is having the opposite effect overseas.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.

“And globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market,” said Dr Lowe.

At the onset of interest rate rises back in May last year, there was widespread uncertainty surrounding house prices.

But Australian property has since proved to be incredibly resilient, clocking six months of consecutive growth after a brief downturn last year.

Regardless of the downturn, it appears some households have capitalised on the record price growth experienced throughout the pandemic.

As Philip Lowe’s term comes to an end, September’s board meeting marked his final chance to lift the cash rate.

But his parting gift to mortgage holders is another month of interest rate reprieve, giving homeowners hope that rising rates could be behind us.