RBA Keeps Cash Rate on Hold: Is Now the Time to Invest in Property? Video Blog

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RBA Keeps Cash Rate on Hold: Is Now the Time to Invest in Property? Video Blog

At the September meeting, the RBA held the cash rate at 4.35%, as was widely predicted. With the US recently lowering their cash rate objective by 50 basis points last week, as well as prior decreases from the UK, Canada, New Zealand, China, and the EU (among others), the RBA’s choice to maintain the cash rate on hold may draw some criticism.

Notably, Australia’s monetary policy hasn’t been ‘as stringent’ as many other Western countries, with a cash rate increase of 425 basis points, compared to 525 basis points in the US and New Zealand, and 515 basis points in the UK.

Furthermore, our tightening cycle has lagged that of most other countries, with cash rates rising beginning in May 2022, as opposed to the US, where the hiking cycle began in March 2022, the UK, where interest rates began rising in December 2021, and New Zealand and the EU, which began rate hikes even earlier, in October and July 2021, respectively.

Furthermore, other countries have made more success than Australia in lowering inflation, with the US headline rate falling to 2.5% from a high of 9.1% in June 2022. NZ inflation fell to 3.3% in the second quarter, whereas UK inflation has been hovering around 2% since April.  

In comparison, Australia’s headline inflation rate was 3.8% in the June quarter, down from a lower peak of 7.8% in the fourth quarter of 2022.

Another aspect supporting Australia’s lagging and softer monetary policy trajectory is the timeliness with which policy choices reach Australian borrowers. Around 70% of Australian mortgages have variable interest rates, which means that changes in the cash rate affect household balance sheets and consumption very quickly. On the other end of the scale, the great majority of US mortgages are locked into long-term fixed mortgage rates (usually 30 years), thus changes in the cash rate may not be as immediate.

The RBA’s decision to keep rates today should be viewed positively. The decision signals that the RBA is comfortable with the gradual downward trend of inflation, while the Bank does not expect core inflation to hit the top end of the 2-3% target range until late next year and is cautious about ‘sticky’ sources of inflation, such as services. Although headline inflation is falling more visibly due to the ‘mechanical’ effect of energy rebates, the RBA is likely to focus on core inflation measures, which may fall more gradually.

Tight labour market circumstances are another reason that may extend the period of high interest rates. With the unemployment rate remaining at 4.2% in July and August, together with solid job growth, low underemployment, and a record-high participation rate, tight labour markets may not be compatible with the expected slowdown in pay growth.

The RBA’s decision to freeze interest rates may increase consumer sentiment, since more people believe rate hikes are over and the next swing would be lower. The main unknown at the present is the timing and pace of rate decreases.