Rates on hold again as the RBA continues to exercise caution

The Reserve Bank of Australia has decided to keep interest rates on hold at its meeting today, dashing hopes of an early Christmas present for mortgage holders.

In a widely anticipated decision, the RBA has once again cited persistently high inflation as the reason for the pause. While acknowledging inflation has fallen substantially since it peaked at 7.8 percent in December 2022, the board said in a statement that there was still work to be done.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” the RBA board said in a statement. “Measures of underlying inflation are around 3.5 percent, which is still some way from the 2.5 percent midpoint of the inflation target.

“The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026.”

In further signals that a rate cut is still some way off, the board noted that the economic outlook remained ‘uncertain’ both in Australia and overseas, where some central banks have made cuts to their cash rates in recent months.

“There remains a high level of uncertainty about the outlook abroad. Most central banks have eased monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets,” the board said. 

“They note, however, that they are removing only some restrictiveness and remain alert to risks in both directions, namely weaker labour markets and stronger inflation. “Geopolitical uncertainties remain pronounced.”

CoreLogic research director Tim Lawless said the RBA board’s decision to stick to its ‘steady as she goes’ approach was finely balanced.

“Tight labour market conditions, juxtaposed with a combination of low productivity growth, weak economic conditions and high inflation demonstrates the ‘narrow path’ the RBA is traversing, keeping rates high while avoiding a recession or blow out in the unemployment rate,” Mr Lawless said. 

“So far, the RBA has held to this path; the economy has staved off a recession, albeit largely due to population growth and government spending.  

“Similarly, households are battling through a seven-quarter ‘per capita’ recession that has been compounded by a period of negative real income growth and a depletion of savings, yet we haven’t seen mortgage arrears rise beyond 2 percent.”

He noted that, despite the lack of movement in the cash rate, home values were up 5.5 percent over the past year, although there was now evidence the heat was coming out of the market.

“Home purchasing is winding down, total listing numbers rising, the clearance rate is falling and homes are taking longer to sell,” he said. “Affordability may increasingly see buyers drop out of the market amid high interest rate settings.”

Based on the data, he said it was still likely mortgage holders could see a rate drop in the first half of 2025. The RBA board will meet again in February.