The Reserve Bank of Australia has offered mortgage holders some relief after it held the nation’s cash rate target at 4.1 per cent following its July meeting today.
The Reserve Bank of Australia has offered mortgage holders some relief after it held the nation’s cash rate target at 4.1 per cent following its July meeting today.
The RBA made the call to hold the rate steady for just the second time in 14 meetings since May 2022.
The move comes amid mixed economic signals after national unemployment fell by 0.1 percentage point to 3.6 per cent in May, but Consumer Price Index data indicated a modest decline in underlying inflation the same month.
Economists at ANZ, Westpac and National Australia Bank had predicted a 25-basis point increase to the cash rate, while Commonwealth Bank called the decision to hold.
In the RBA's statement on the monetary policy decision, governor Philip Lowe said the decision was taken to allow time to assess the impact of higher interest rates on the supply and demand balance in the economy.
However, he highlighted that inflation remained too high and suggested further tightening of monetary policy may be required.
"High inflation makes life difficult for everyone and damages the functioning of the economy," he said.
"It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
"And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment."
Mr Lowe said the RBA board remained alert to the risk of ongoing high inflation increasing prices and wages, given limited spare capacity in the economy and low unemployment.
He also acknowledged the pain experienced by some households as a result of higher rates.
"The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending," Mr Lowe said.
"While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances."
The decision to hold the cash rate comes a day after Roy Morgan released new research which estimated that 1.43 million, or 28.8 per cent of Australian mortgage holders, were ‘at risk’ of mortgage stress over the three months to May.
Over 19 per cent of mortgage holders were considered ‘extremely at risk’, according to Roy Morgan, representing 922,000 Australians.
Deloitte Access Economics partner Stephen Smith said the decision showed the RBA had recognised a need to pivot to achieve its goals.
"Today’s decision to pause rate hikes shows the RBA has realised the economy is on a knife’s edge and that it must pivot to achieve its goal of threading a “narrow path” through current economic conditions,” he said.
“Growth is already slowing sharply, led in particular by the two most interest-rate sensitive components of economic activity – consumer spending and housing investment.
“Moreover, a significant part of the pain – of fixed-rate mortgage holders resetting to variable rates – is yet to be felt in full.
“It is notable that Governor Philip Lowe has dropped reference to the economy remaining on an “even keel” in his statement announcing today’s monetary policy decision.”
Mr Smith labelled monetary policy a "spent weapon" and said it was time to turn to fiscal policy, investment and innovation to lift productivity, competition policy to improve efficiency and erode market power, and tax policy to boost prosperity.
Canstar finance expert Steve Mickenbecker said the pain was not over for mortgage holders. His firm expects at least two more cash rate rises in 2023, and doesn't expect the rate to fall until 2025.
"Borrowers could already be buckling under the pressure of paying an extra $1,217 in monthly repayments on a $500,000 loan since the Reserve Bank started lifting rates in May last year. At least there is a reprieve in July,” he said.
AMP head of investment strategy and chief economist Shane Oliver said he expected to see the RBA cut rates through next year, but expected further hikes in August and September to take the rate to a peak of 4.6 per cent.
This prediction was in contrast to Commonwealth Bank senior economist Belinda Allen who said the bank's base case forecast one final 25-basis point hike to 4.35 per cent in August, a prediction that could change pending the results CPI forecast data expected later in July.
Speaking on today's announcement, CoreLogic research director Tim Lawless said downside risks remained for the housing sector, which was wary of potential for a rate increase in August.
"Currently high interest rates and the potential for a hike in August could weigh further on consumer sentiment, which is already around GFC lows," he said.
"Historically consumer sentiment and housing market sales have been closely correlated."
Mr Lawless said the June quarter inflation outcome to be released late in July would be a critical indicator of potential hikes to come.
On the business front, the Australian Chamber of Commerce and Industry labelled today's announcement a welcome reprieve from monetary tightening pressures.
Chief executive Andrew McKellar said the decision to offer some reprieve from rate rises would have a big impact for businesses grappling with tough market conditions.
"After experiencing 12 interest rate increases, declining consumer spending, and a surge in input costs, small and family businesses are being brought to their knees," he said.
Mr McKellar said wage bills were also on the rise, which combined with the increase to superannuation guarantee would have a significant impact for small business.
Mr Lowe will speak at the Economic Society of Australia's National Conference in Brisbane on July 15, where he is expected to shed further light on the RBA's near-term policy outlook.
