An interest rate pause, but the pain may not be over yet

The prospect of another interest rate hike rests on the outcome of the June quarter inflation figures, research director at property data analysts CoreLogic said.

CoreLogic’s Tim Lawless said while yesterday’s decision by the RBA Board to keep interest rates on hold was welcome news for mortgage holders, it was not an indication that rates had peaked.

“The June quarter inflation outcome, to be released late this month, will be critical in determining whether there are more rate hikes ahead,” he said.

Although most economists expected the RBA Board to increase the cash rate by another 25 basis points yesterday, governor Philip Lowe said the board recognised the need for a pause as the full impact of a four per cent rise in rates since May last year fully played out. 

However, another rate rise is clearly still on the table.

“Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline,” Mr Lowe said. “But inflation is still too high and will remain so for some time yet.

“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. For these reasons, the Board’s priority is to return inflation to target within a reasonable timeframe.”

Navigating a pathway through managing inflation via additional rate rises without further limiting access to credit will be tricky, Mr Lawless said. At the same time, higher cost of living was having a negative impact on consumer confidence.

“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.

“The combination of high cost of living pressures, negative real income growth and the high cost of debt have made it hard for borrowers to obtain credit approval, especially with lenders less willing to lend on high debt-to-income ratios, high loan-to-income ratios or on smaller deposits.”

He said the current level of interest rates would most likely expose more borrowers to mortgage arrears in the coming months, although it may not be as severe as some predicted.

“To date, the majority of borrowers have kept on track with their mortgage repayments, with APRA data for the March quarter indicating only half a percent of home loan borrows had fallen less than 90 days behind on their mortgage repayments,” Mr Lawless said.  

“While the portion of borrowers falling behind on their repayment schedule is likely to rise, Australia’s unemployment rate is forecast to remain below 5 percent, which should help to prevent a material blowout in mortgage arrears.”