RBA holds rate, no cuts this year

The Board of the Reserve Bank of Australia (RBA) has decided to keep the cash rate on hold at 4.35% following its August monetary policy meeting, warning there are unlikely to be any interest rate cuts this year.

The decision to keep rates on hold was widely expected after recent quarterly inflation figures came in according to forecasts and following volatility on global share markets in the last few days, spooked by the prospect of a recession in the United States.

While mortgage holders will be breathing a sigh of relief that interest rates won’t be going higher, the RBA has stressed that cuts are not on the Board’s agenda “in the near term”, with Governor Michele Bullock explaining that means for at least the remainder of this year.

The RBA’s latest economic forecasts also only assume one interest rate cut of 0.25% by June next year. 

The details

The RBA Board has decided to keep rates on hold at 4.35%—a 12-year high—while stressing that its highest priority is “returning inflation to target within a reasonable timeframe.”

The central bank has set a deadline of the end of 2025 to have Australia’s inflation rate (currently at 3.8%) back in its target 2-3% band.

Some economists and market watchers have expressed concerns that inflation is falling too slowly, and even the RBA’s own press release accompanying the decision stressed that “inflation in underlying terms remains too high.”

The press release said the Board was not “ruling anything in or out” and that monetary policy (or interest rates) would need to be “sufficiently restrictive” (or high) until the board was confident inflation was “moving sustainably towards the target range”.

“The job is certainly not done on inflation; it is still too high and rising at too fast of a pace to bring it into the target range,” according to PropTrack Research Director Cameron Kusher.

“While we should remain cautious to the prospect of interest rates rising if inflation doesn’t slow, economic data from the US published last week showed a significant weakening of the labour market and heightening expectations of an economic slowdown in the US.” 

“This could reduce the likelihood of further interest rate rises here and potentially result in rates being cut sooner,” he said.

Bullock talks tough

However, in her post-decision press conference, Governor Michele Bullock played down the significance of US recession fears and stock market turmoil on the RBA’s thinking, choosing to highlight the risks that inflation posed to the economy.

“There is still a risk that inflation will take too long to return to target,” she said.

Ms Bullock revealed the RBA Board had considered a rate increase at its August meeting but decided against it.

“The judgement of the board was that keeping the interest rate where it is and making sure that people understand that a rate cut is not on the agenda in the near term, given what we know, that continued pressure will help to keep demand coming back into line with supply.” 

“But I should say that they are vigilant to the upside risks; if it does appear that inflation is not tracking the way we are forecasting, then they (the Board) will, if needed, increase interest rates,” she said.

When asked what “near term” meant, the Governor referred to money market pricing, where traders have been betting that the RBA would start cutting rates in November this year.

“The market path at the moment is pricing in interest rate reductions by the end of this year,” she said.

“I think the board's feeling is that the near term—by the end of the year and the next six months—that doesn't align, given what the board knows at the moment and given what their forecasts are, that that doesn't align with their thinking about interest rate reductions at the moment.”

In other words, don’t expect an interest rate cut in Australia this year.

The RBA’s own forecasts

At the same time as it released its cash rate decision, the RBA also released its latest Statement on Monetary Policy, which includes the central bank’s latest economic forecasts. 

The forecasts are made on several “assumptions” which include that the cash rate will be 4.3% in December (essentially unchanged from the current 4.35%), 4% in June next year, 3.5% in December 2025 and 3.3% in June 2026.

While these are “assumptions”, they clearly inform the central bank’s view of the direction of the Australian economy. 

The take-out

The main take-out from the RBA’s August board meeting for homeowners and investors is that don’t bank on interest rate cuts anytime soon.

However, that’s not necessarily bad news for the property market.

PropTrack’s Cameron Kusher believes the rate of growth in home prices nationally has slowed over the past five months.

But he also points out that dwelling approvals are at their lowest point in more than a decade, at a time of high population growth

“More properties are being listed for sale, and sales volumes remain robust,” he said.

“Stable interest rates are likely to support vendor and purchaser confidence as we head into the busier spring period.”

In other words, just because mortgage rates will remain higher for longer, don’t expect property prices to fall.