For the fourth consecutive month, the Reserve Bank of Australia has kept the official cash rate at 4.1%, however it has not ruled out raising rates in the future if necessary to bring stubborn inflation back down to target.
So far its the fifth time that the RBA has put rates on hold during its current rate-hiking cycle since May of last year, when the bank started raising rates to combat out of control inflation. The cash rate is now at its highest level since April 2012, and many mortgage holders and borrowers are stretching their resources thin to keep up with both inflation and rising rates.
Although inflation increased to 5.2% in August from 4.9% in July, the RBA's decision to keep rates steady was in line with what financial markets and analysts had predicted. Fuel price increases, which have a knock-on effect on transportation expenses, together with increases in the costs of housing, food, and insurance, led to the first monthly rise in inflation since April. However, underlying inflation continued to fall which was probably part of why the RBA felt comfortable holding this month.
We’ll take a look at the ins and out of this latest Monetary Policy Meeting below and how the Aussie economy is fairing as a result.
RBA debut’s its new Governor
The board meeting this week was the first under new Governor Michele Bullock, who succeeded Philip Lowe last month after his term ended. Investors were eager to see if her leadership would alter the direction of policy, but in her first public remarks she echoed Mr. Lowe's previous comments that further rate hikes may be necessary in the future to battle inflation.
Bullock said that the RBA anticipates inflation to revert to its target range of 2-2.5% towards the end of 2025, but she also concedes that increasing fuel costs and rents will likely be problematic for that goal to be achievable.
"Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly and fuel prices have risen noticeably of late. Rent inflation also remains elevated," she said. "Inflation is coming down, the labor market remains strong and the economy is operating at a high level of capacity utilization, although growth has slowed."
RBA remains cautious
The board’s statement today highlighted some significant uncertainty surrounding the central bank forecast and encouraged the use of caution as it continues to navigate a narrow path to an economic ‘soft landing.’
The board suggested that Inflation in the cost of services has been remarkably constant in other countries, and this trend may eventually reach Australia. Also, even if the labor market is tight, there are questions about how long it will take for monetary policy to take effect and how companies will adjust their pricing and pay structures in response to slower economic growth.
In the case of the property market, it's true that some families are benefitting from growing property values, sizable savings buffers, and greater interest income, while others are feeling a harsh strain on their finances, leaving them unsure about household consumption.
According to an analysis by RateCity.com.au of data from the Reserve Bank and other major banks, 730,000 mortgages have recently transitioned off their ultra-low fixed rates in 2023 to the much higher variable rate, with another 150,000 expected to follow for the rest of the year.
According to RBA data, 590,000 mortgages came off fixed rates in 2022, followed by 880,000 expected in 2023 and another 450,000 in 2024.
Furthermore, worldwide anxiety surrounding the future of the Chinese economy is still a concern as a result of continuous pressures in the housing market there.
Aussies cutting back or going without
According to recent research of 7 million Commonwealth Bank customers' spending patterns for Australian Financial Review Weekend, senior Australians have increased their total spending across all discretionary categories over the last 12 months consistently more than younger age groups.
Its attributed to the higher interest rates generally have increased the disposable income of Australians over 65, enabling them to indulge on plane tickets, vacations, and cruises while younger age groups have apparently been cutting down.
RBA officials also recently addressed data revealing the long lag between people first experiencing financial stress, and showing up in official data on loan arrears in papers released under the Freedom of Information Act.
According to an internal RBA email from July following a meeting with helpline staff, statistics revealed a large upsurge in demand for the national debt hotline, particularly from users who had never previously used the service before and had seemingly stable incomes.
A large percentage of people who called the national debt hotline described being in financial difficulty and collecting more debt via the use of credit cards, buy now pay later, loans from friends and family, and increasingly unmet commitments to the Australian Tax Office, their utility suppliers, and council rates. In order to make up for financial shortages, people were also reported to be skipping insurance payments, underinsuring themselves, or researching ways to access their superannuation early.
Rates Forecast
17 out of 30 economists polled by Reuters predicted that the RBA would raise the official cash rate to at least 4.35% by the end of this year. The remaining 13 polled predicted no change to rates.
ANZ, CBA, and Westpac, three significant Australian institutions, have suggested that the RBA has completed its tightening cycle. Only NAB anticipated an additional 25 basis point increase to come in November.
More data critical to the decision making process are to be released later this month, including Employment figures on the 20th October, new quarterly inflation figures on the 25th October and monthly inflation figures are also expected on the 31st of October.
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