The RBA Board on Tuesday elected to keep the official cash rate steady at 4.35% on the back of persistent inflation.
In her usual post-meeting face-time with the press, RBA Governor Michele Bullock said the Board has voted between holding and hiking the cash rate, revealing that a case for cuts was “not on the agenda” for the near term.
“There were only two things on the table: hold – accepting that we might have to hold for some time – or raise,” Gov Bullock said.
But the Board, committed in its resolve to pursue the “narrow path” of returning inflation to target without tanking the economy and people losing jobs, decided to “stay where we are”.
The stability would have been welcome at a time of market volatility, with the ASX tumbling after Japan's Nikkei dropped 13% on Monday, its worst day since 1987.
“Many people are doing it tough and we’re very conscious of that,” the RBA boss said.
“The best thing we can do is to bring inflation back down to target because we can’t let inflation get away – it hurts everyone.”
And the wait for interest rates to fall is becoming longer as the RBA’s preferred path to returning inflation to target becomes narrower.
Against all odds though, most borrowers are still able to meet their obligations according to the chief financial officer of major non-bank lender Firstmac.
Firstmac CFO James Austin told the Savings Tip Jar podcast that despite the interest rates holding steady at its 12-year high since November 2023, delinquency rates for home loans and car loans are still low.
Mr Austin said only 0.5% of the total home loans under Firstmac management have more than two payments missed.
Meanwhile, car loans in arrears are a touch higher but still low at 1%.
“We know that conditions have remained pretty good in Australia – mortgages are being paid, house prices continue to rise, and the unemployment rate remains low,” Mr Austin said.
“As far as long-term arrears rates and default rates, these are still very, very low. Even for auto (borrowers), 99% are on time and making their payments.
“When you think we’ve had over 400 points of rate increases, it’s actually surprising that it’s all held up so well.”
Borrowing remains subdued
The ABS’ latest lending data revealed a 1.3% uptick in new housing loans, excluding refinances, in June.
This translates to $29.2 billion in seasonally adjusted terms, with investors driving the growth.
Earlier prospects of rate cuts and increased investor confidence amid steady rates and sustained increases in home values were seen as the main drivers of increased home lending.
However, CoreLogic said the recent RBA hold may not be enough to see that rise in consumer sentiment flow through housing market activity.
“Although a stable interest rate decision is seen as a positive for borrowers and housing more broadly, we aren’t expecting today’s outcome will have a material influence on housing trends,” CoreLogic research director Tim Lawless said.
Mr Lawless reiterated that the recent growth in property prices has had more to do with low supply and low vacancy rates than sentiment through the housing upswing.
“Many of these factors are now losing their potency, with the trend rate of home sales easing as affordability becomes more challenging, migration slows, and momentum leaves the upswing in rents,” he added.
“Even if sentiment lifts, an improvement in affordability barriers or strengthening in household balance sheets isn’t likely until interest rates start to fall.”
However, keeping the benchmark interest rate higher is undeniably hurting debtors the most.
Inflation target moves further away
In its August Statement on Monetary Policy (SMP), the RBA once again pushed back its mid-point inflation target by another six months.
From landing at 2.6% (trimmed mean inflation) by June 2026, the central bank now expects to reach the rate by December 2026.
At one stage, it was forecast to be within the 2-3% zone by the end of 2024, but the RBA seems to prefer to protect gains in jobs rather than rush to stamp out inflation.
The SMP reads, “The outlook for growth has been upgraded due to stronger-than-forecast public demand as well as a pick-up in household spending as real incomes rise.”
Economists and financial experts have chalked it up to RBA’s strategy to keep the rates lower for longer, relative to similar advanced markets.
“The Australian central bank rates have remained way below the rest of the world,” Mr Austin said.
“So whilst other central banks elsewhere are starting to cut, we're still well below those, so the question is – has our cash rate been high enough to bring inflation back within the target band?”
He said, if anything, the latest statement was more hawkish than expected and if anything, a rate hike seems more likely in the short term, with a rate cut is “quite a long way away”.
Big Four banks ANZ and NAB have earlier revised their rate cut forecast from November 2024 to February and May next year, respectively.
Westpac on Tuesday signalled that a revision is on the way, with chief economist Luci Ellis saying, “Given the Board apparently does not see its way to cutting rates this year, our expectation of a November rate cut is unlikely to be achieved.”
CBA is yet to announce whether it will revise its November rate cut call.
Photo by Johannes Plenio on Pexels
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