The RBA kept Australia’s official cash rate at 4.1% once again at its August meeting, leading some experts to think we’ve already seen the last hike of this cycle.
While the dozen hikes put forward since May 2022 appear to be taking their toll on inflation it remains well above ideal levels and unemployment is still near its 50-year low.
The latest quarterly consumer price index (CPI) read found annual inflation is at 6% – down from its peak of 7.8% in late 2022 – and unemployment slipped to 3.5% in June.
The RBA is targeting an average inflation rate of between 2% and 3% and believes unemployment should rise to around 4.5%. The cash rate is the only tool in its arsenal.
Impacts on borrowers, consumers, and house prices
The rising cash rate, and resulting interest rate hikes, has turned up the heat on Aussie borrowers. Particularly those holding home loans.
Mortgage stress in Australia has reached an all-time high, according to data from RFI Global.
It found nearly a third of borrowers expect to struggle to meet their repayments within the next 12 months, with rising rates overtaking inflation as their top concern.
The prior dozen rate hikes have also dinted hopeful-homeowners’ ability to save a deposit amid still-rising house prices.
“There has been a big hit to home buyer ‘capacity to pay’ from higher rates,” AMP chief economist Shane Oliver said.
“We estimate that the capacity to pay for a home for a borrower with a 20% deposit on full time average earnings is around 29% lower than it was in April last year.”
But not all were pleased by the RBA's latest halt. Judo Bank chief economic advisor Warren Hogan told the Savings Tip Jar Podcast the central bank has shown it's willing to live with inflation for longer than necessary.
It subtly pushed its 2-3% underlying inflation goal out by six months, from mid-2025 to end-2025.
“That has a range of implications, not least that is going to bring the misery to the broader community for longer,” Mr Hogan said.
“If the economy proves resilient … then they're going to be in a situation where inflation could get away from them next year and they'll have no choice but to jack up rates so hard, they'll put the economy into a deep, bad recession.”
One sign that the economy remains resilient is Australia’s still-high housing prices. Though, that could soon change.
“The rapid reversal in the capacity to pay since May last year due to the surge in mortgage rates threatens a downwards adjustment in home prices at some point unless incomes rise dramatically or mortgage rates fall dramatically – both of which look unlikely for now,” Dr Oliver said.
Expert forecasts
Dr Oliver expects rates are likely at or nearing their peak for now.
That sentiment is echoed by eToro market analyst Josh Gilbert.
“The case for keeping rates on hold was influenced by lower-than-expected inflation, declining retail sales, and Governor Philip Lowe’s bid to engineer a soft landing,” Mr Gilbert said.
Though, some other experts are less sure, with CoreLogic research director Tim Lawless admitting that while yesterday’s pause could be a welcome relief for borrowers, more hikes could be on the horizon.
“Considering the RBA is working with a mixed bag of key data sets that guide their decision making, another rate hike down the track remains a possibility,” Mr Lawless said.
He commented that the range of opinions put forward by experts reflects the “sheer uncertainty” facing the economy.
More hikes or a lengthy hold: What do the big four banks predict?
Australia's major banks have their own expectations of what might happen in the RBA board’s upcoming meetings. At the moment, economists at the big four are, for the most part, in agreeance.
CommBank
Economists at CommBank shifted their expectations for the cash rate following yesterday’s pause. The bank now tips it to stagnate at 4.1% for some time.
Prior to the RBA’s latest decision, CommBank had forecast a 25 basis points hike this month.
CommBank economists believe inflation, wages, and spending data would need to surprise on the upside before another hike would be implemented.
NAB
NAB economists also changed tack on their cash rate forecasts after Tuesday’s hold. They now expect the cash rate to peak at 4.35%, with a final hike most likely to be implemented in November. It previously foresaw two more hikes, driving the cash rate to peak at 4.6%.
If its prediction comes to fruition, the RBA might put forward further holds in its September and October meetings.
Westpac
Meanwhile, Westpac chief economist Bill Evans believes more holds could be on the cards from now.
“The balance of risks now favours the prospect that the RBA is now on hold,” he said.
Though, Westpac isn’t ruling out the chances of another hike next month.
ANZ
Finally, ANZ’s forecast is on par with those of its big four banking peers – it predicts the RBA is now on an extended pause.
Though, its economists note that if the RBA is to move rates in the near future, a hike is far more likely than a cut.
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