Cautious Optimism as RBA Holds Interest Rates Steady: Property Market Shows Signs of Recovery: Possible end of rate rising cycle indicated
The Reserve Bank of Australia (RBA) has chosen to keep interest rates unchanged for the second consecutive month, providing hope to borrowers that the tightening cycle may have come to an end.
During the August board meeting, the RBA decided to maintain the official cash rate at 4.1%, where it has been since June. This decision comes as inflation eases and household spending slows down. RBA Governor Philip Lowe stated that higher interest rates are playing a role in balancing supply and demand in the economy, and they will continue to do so. The board opted to hold rates steady to assess the impact of the previous rate increases and evaluate the economic outlook further.
Inflation has been cooling faster than expected, dropping from 7.8% in the December 2022 quarter to 6% in the June 2023 quarter. Although still above the RBA's target range of 2-3%, updated forecasts predict inflation to ease to around 3.25% by the end of 2024 and return to the target range by late 2025.
Senior economist Eleanor Creagh believes this eases some pressure on the RBA and allows more time to assess the economic outlook. The tight labor market and rising services inflation have yet to fully reflect the impact of recent rate increases, suggesting inflation will continue to moderate and decline through the first half of 2024.
The RBA has not ruled out future rate hikes if inflation takes too long to return to target levels. The priority remains returning inflation to the target range within a reasonable timeframe, with uncertainties still present.
Regarding the property market, confidence is returning as interest rates are widely believed to have peaked. The PropTrack Home Price Index rose for the seventh consecutive month in July, with national home prices 1.36% higher than a year ago. Ms. Creagh notes that home prices are now just 1.44% below the March 2022 peak, and some capital cities have even reached new record highs. Strong housing demand and limited new listings have offset the impact of interest rate increases since May 2022, leading to solid selling conditions and rising prices.
Economists' opinions vary on whether interest rates have peaked. ANZ forecasts an "extended pause" at 4.1% until late 2024, when they expect the RBA to start cutting rates. On the other hand, Westpac and CBA anticipated one final rate hike in August, taking the cash rate to a peak of 4.35%. NAB has not ruled out further rate hikes but expects a decrease to 3.1% by December 2024.
If interest rates drop from 4.1% to 3.1%, modeling from realestate.com.au shows that borrowers with $500,000 outstanding on their mortgage could save around $327 per month, assuming lenders pass on the cuts in full.
Overall, cautious optimism surrounds the RBA's interest rate decision, and the property market shows encouraging signs of recovery. The coming months will be crucial in assessing economic trends and inflation as the RBA aims to strike a balance between growth and stability. Borrowers and homeowners can look forward to potential benefits from the current interest rate environment.
