Rates on hold and two cuts by Christmas: Reserve Bank of Australia

As widely expected, the board of the Reserve Bank of Australia (RBA) has left interest rates on hold at its first meeting for 2024.

The cash rate will remain at the current level of 4.35%, where it has been since November 2023.

Most analysts believe the RBA is now at the peak of its rate-hiking cycle, after raising rates no less than 13 times in a bid to check Australia’s runaway inflation.

With the last quarterly inflation measure coming in well below expectations and even the RBA’s own previous forecasts, it seemed a certainty the central bank would keep rates on hold…and indeed, it did not disappoint.

“This is a decision which will be welcomed right around the country,” Federal Treasurer Jim Chalmers told parliament.

“This will come as welcome relief for Australians who are already under the pump.”

Caution, caution…

In a statement announcing that rates would remain on hold, the RBA board expressed caution about the future direction of interest rates.

While welcoming the lower-than-anticipated December quarter inflation numbers, the board says 4.1% inflation is still too high, and it wouldn’t hesitate to act (i.e. put rates up again) if it thought inflation was not on track to return to the bank’s target band of 2-3% by the end of 2025.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the RBA board declared.

“The Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.”

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Explaining the board’s thinking at a press conference, RBA Governor Michele Bullock put it this way:

“The best thing that we can do with our tool (interest rates) is help households deal with the cost of living by getting inflation down,” she said.

“That's our aim. We want it back down again.”

And as to the “do what is necessary” line in the board statement, which appeared to dampen hopes of early cuts in interest rates, Ms. Bullock put it this way;

“We haven't ruled anything out and we haven't ruled anything in.”

“So I would say we have maintained the option that it might be…. that there has to be more rate rises, but there might not be either.”

“Nothing's in, nothing's out.”

“The optionality here really needs to be maintained because we need to be driven by the data.”

EY Oceania Chief Economist Cherelle Murphy says the central bank is taking a cautious, but sensible approach.

“There's still a number of inflation risks on the horizon and actually coming through the economy currently…so the strong jobs market is definitely creating a tight situation for labour, and we may not have seen the end of wage increases.”

“There's also a really hot housing market ... we've had international shipping rates go up, and we've, of course, got the conflict in the Middle East.”

“All of these things could potentially impact our imported inflation, such as energy, so I think the Reserve Bank is playing it safe, and that's the right course of action at the moment,” she told ABC News.

A new broom, and a light at the end of the tunnel…

February’s rate decision is the first under the RBA’s new communication and meeting arrangements, which have seen the number of monetary policy board meetings per year reduced from 11 to 8.

Each board meeting now goes for two days, giving members more time to quiz RBA officials, economists and analysts on the details of economic developments and the possible impact of rate decisions.

We now see the RBA Governor face the media on the same day of the board announcement to explain the decision.

In another first on the same day, we also get to see the latest Statement of Monetary Policy from the RBA - a kind of economic snapshot of where the central bank thinks the economy is heading.

And the RBA staff’s thinking on the future of interest rates is there for all to see:

You can clearly see that by December 2024, the RBA is assuming interest rates will be at 3.9%.

Given that rates are currently at 4.35%, the RBA is basically saying it expects that rates will be cut by almost two lots of 25-basis points by Christmas.

The RBA is also assuming a cash rate of 3.6% in June 2025 and 3.2% in June the following year.

At her press conference, RBA Governor Michele Bullock was at pains to point out these were just “technical assumptions” of the cash rate, not forecasts.

“I emphasise the word assumption,” she said, “It isn't a commitment, it isn't a forecast, it isn't even an expectation.”

“It's something to work with.”

Still, it’s an important clue to the thinking inside the central bank and the type of advice the RBA board is receiving.

What does this mean for the housing market?

Reacting to the RBA’s decision to keep rates on hold, PropTrack economist Anne Flaherty described it as “good news for the housing market, which looks set to benefit from a more stable interest rate environment in 2024.”

“Greater confidence around where interest rates are sitting should support further recovery in buyer and seller confidence.”

“House prices have displayed remarkable resilience, with buyer demand remaining strong relative to the supply of homes coming to market,” Ms Flaherty says.

Investment bank Jarden is even more bullish about property prices.

“We estimate that for every half of a percentage point reduction in the cash rate will be worth about 4 per cent to 5 per cent for house prices,” Jarden’s chief economist Carlos Cacho told the Financial Review.

Jarden is not currently forecasting any move by the RBA to cut rates this year but is still expecting national property prices to grow by 5%.

So if there are rate cuts this year, that “would suggest that price growth could increase closer to 10 per cent, rather than our 5 per cent expectation”, according to Mr. Cacho.

In another piece of data out today, the ANZ-Roy Morgan consumer confidence index rose 1.3% in the past week, possibly buoyed by the prospect of larger tax cuts for lower and middle-income earners and the RBA’s widely anticipated decision to keep rates on hold.

According to ANZ economist Adelaide Timbrell, the decision to keep rates on hold will “help confidence for indebted homeowners, who on average now have higher confidence than renters for the first time since mid-2022.”

ANZ and the NAB, however, believe there will only be one interest rate cut by the RBA this year, with the central bank wary about letting the inflation genie back out of the bottle.

At the other end of the scale is Australia’s largest mortgage lender, the Commonwealth Bank, which is forecasting no less than three rate cuts this year, starting in September.

Rate comparison site RateCity estimates that if the banks pass on an initial 25 basis point cut in full, that will save a household with a $500,000 mortgage about $76 a month, $114 a month on a $750,000 loan and $152 for people with a $1 million mortgage.

But there might be a sting in the tail with further rate cuts.

RateCity has released research showing there have been 10 cash rate cuts in the last decade (December 2013 – December 2023).

Three of the big four banks – CBA, NAB and ANZ have passed on just four of them in full (40%), while Westpac has passed on just two in full.

However, Westpac did hand out one larger-than-prescribed rate cut in February 2015 (0.28% pts rather than 0.25% pts).

“Don’t bank on a rate cut until it hits your bank account,” says RateCity’s Research Director Sally Tindall,

“Even when the RBA does finally start to cut the cash rate, there’s no guarantee your lender will pass it on in full.”

“While lenders should play ball for the first cut at the very least, the further the cash rate falls, the more likely we are to see some lenders hold part of the official cuts back,” Ms Tindall says.