An early Christmas present for mortgage holders as rates hold steady

Interest rates will remain at 4.35 percent following a meeting of the Reserve Bank of Australia board today. The decision by the board, which was widely predicted by economists, follows on from the November meeting where rates rose by 0.25 percent, the first rise in four months.

Governor Michele Bullock said last month’s rise was designed to accelerate the decline in inflation which the board considered to be happening at a slower pace than required.

“This decision reflected the Board’s view that progress in bringing inflation back to the target range of 2 to 3 percent was looking slower than earlier forecast,” Ms Bullock said. “While the economy has been experiencing a period of below-trend growth, it was stronger than expected over the first half of the year.”

The increase in the cash rate had been an effective tool in moderating inflationary pressures, she said.

“Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy,” Ms Bullock said. “The impact of the more recent rate rises, including last month’s, will continue to flow through the economy.

“High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market.”

Head of research at CoreLogic Australia Eliza Owen said last month’s rise had already impacted on the property market, with November property values recording their smallest increase since February at 0.6 percent.

“Recent market performance indicates that while housing has been surprisingly resilient this year in terms of capital gains, interest rate increases have had some impact,” Ms Owen said. “This is particularly the case where rate increases were unexpected. This was evident following the ‘surprise’ rate hike through June, and appears to have had some impact through November.”

While the RBA board will not meet again until February 2024, Ms Bullock would not rule out further rises in the new year.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” she said in a statement. “In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.

KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.

“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”

Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.

However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.

Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.

The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.

“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”

An early Christmas present for mortgage holders as rates hold steady

The RBA board cited the impact of last month’s rate rise as a determining factor in the decision

Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected