No early Christmas present from RBA

As was widely expected, the Reserve Bank of Australia has NOT delivered an early Christmas present to Australians with a mortgage - opting at its December board meeting to keep the cash rate on hold.

Official interest rates have now been at a 13-year high of 4.35% since November 2023.

That translates into retail mortgages of around 6.5 to 7.5% - a lot of extra interest and pain to absorb for people who took out mortgages when variable rates were around 2-3%.

However, in the statement accompanying its December decision, the central bank noticeably changed some of its language, saying it is “gaining confidence” that inflation is returning back to the bank’s mandated 2-3% target, leading at least one major bank to brand the RBA’s language as “dovish”.

The details

The board of the Reserve Bank is clear.

“Underlying inflation remains too high” is written in bold print on the media release which accompanied the December decision.

The bank notes that while “inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance… measures of underlying inflation are around 3.5%, which is still some way from the 2.5% midpoint of the inflation target.”

However, in a notable change of language, the Board says it “is gaining some confidence that inflation is moving sustainably towards the target”, and it has dropped the phrase that it is “not ruling anything in or out”, which many saw as a threat that it was prepared to hike interest rates again.

Dr Angela Jackson from Impact Economics says these are changes “which should give some people confidence that they (the RBA) are getting ready to move on cutting rates.

“That will make households feel a little bit better going into Christmas, that there is some hope of that relief, hopefully early in the new year.”

Dr Jackson says that the RBA acknowledges the weakness of the Australian economy, which she believes is “literally crawling along the ground at the moment.”

However, she says it’s only when that weakness “translates through to unemployment and to those inflation figures, that's when I think they'll have more confidence to move.

“I think if they can see unemployment starting to go up, which is a pretty negative and I guess Grinch-like metric to be aiming for - so wanting to see more people out of work - that will be an indication to them that maybe they have indeed gone far enough.”

However, RBA Governor Michele Bullock insists that the board is not keen to see a jump in the unemployment rate.

“We want to bring inflation down in a way that doesn't cause a spike in unemployment,” she told a press conference.

“That's the balancing act we are trying to get right, and it is a challenge.”

Explaining the change in tone in the RBA’s statement, she told reporters it was “deliberate”, with the board wanting to “give the message that they have… noticed some of the data that is .. on balance, a bit softer than we had expected.” 

“And so the board wanted to convey that their … views are evolving … as the data evolves.

“So we're not saying that we've won the battle against inflation yet, but we're saying we've got a little bit more confidence that things are evolving as we think in our forecasts,” Ms Bullock said.

However, the RBA Governor also revealed that the board did not consider a rate cut at its December meeting.

“We did not explicitly consider an interest rate cut,” she said.

“We asked the question of whether or not we felt that the current stance of policy was appropriate.

“The Board spent time talking about what are the sorts of things that would make them move one direction or the other.”

The outlook

Most forecasters say the decision confirms their view that the RBA is unlikely to cut interest rates before May next year, with only Commonwealth Bank believing the conditions will be ripe for a rate cut in February, when the RBA board next meets.

While the prospect of no cut in official interest rates for at least six months may seem overwhelming, it is possible to change to a lower retail variable interest rate.

If you are in this position and haven’t taken any action, you could be paying thousands of extra dollars a year in interest - and that’s after you account for exit fees and charges on your existing loan.

New research from RateCity.com.au finds that if homeowners with an average $500,000 mortgage refinanced in December last year to the best possible rate on offer (and remember, the cash rate hasn’t changed in a year), they would have saved $6000 in repayments over the past 12 months.

“Plenty of borrowers would have liked a little treat in the form of a rate cut for Christmas, but they’ll need to gift it to themselves,” says RateCity.com.au’s Money Editor, Laine Gordon.

“Even if you didn’t get around to switching last year, all is not lost.

“Refinancing now could still save you almost $10,000 in interest over the next two years if you switch to a rate under 6%.

“For borrowers with bigger loans in Sydney and Melbourne, those savings could be closer to $20,000,” she says.

“Buyers’ market” conditions to ease as listings decline?

Related

Australians set to punish politicians who don’t deliver on housing

Related

Housing market

PropTrack Senior Economist Eleanor Creagh says home price growth has persisted despite the continuing higher interest rate environment and is set to reaccelerate when interest rate relief does arrive.

The property analytics firm’s Home Price Index showed national prices hit a fresh record in November, though Ms Creagh points out the pace of growth has slowed.

“The increase in properties hitting the market this year has been met with strong demand, but increased stock for sale has been a contributor to slowing price growth, along with affordability constraints and the sustained higher interest rate environment.

“While home price growth is currently slowing, it is expected to gain momentum once interest rates begin to fall, though the timing of rate cuts remains uncertain.

“If conditions warranting rate cuts emerge in May 2025, improving affordability and buyer confidence are expected to drive renewed demand and price growth through the second half of the year,” she says.