Interest rates on hold as RBA says economic outlook remains ‘uncertain’

The Reserve Bank of Australia (RBA) has opted to keep interest rates on hold at 4.35 per cent at its March meeting, highlighting that the economic outlook remains uncertain, despite a recent drop in inflation.

RBA Governor Michele Bullock said the headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing in recent months.

This has been driven by moderating goods inflation. 

But she said services inflation remained elevated and was moderating at a more gradual pace. 

She said conditions in the labour market also continued to ease gradually but remained tighter than that consistent with sustained full employment and inflation at target. 

“Wages growth picked up a little further in the December quarter, but appears to have peaked with indications it will moderate over the year ahead,” she said.

“Nevertheless, this level of wages growth remains consistent with the inflation target only on the assumption that productivity growth increases to around its long-run average.

“Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.”

Ms Bullock said while it was encouraging that inflation was moderating, the economic outlook remained “uncertain”.

“The December quarter national accounts data confirmed growth has slowed,” she said.

“Household consumption growth remains particularly weak amid high inflation and the rise in interest rates. 

“After recent declines, real incomes have stabilised and are expected to grow from here, which is expected to support growth in consumption later in the year.

“Meanwhile, growth in unit labour costs remains very high. 

“It has begun to moderate slightly as measured productivity growth has picked up in the past two quarters but whether this trend will be sustained is uncertain.”

Ms Bullock said forecasts predicted inflation would return to the target range of 2-3 per cent in 2025, with the midpoint in 2026.

“Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases,” she said.

“Employment is expected to continue to grow moderately, and the unemployment rate and the broader underutilisation rate are expected to increase a bit further.”

The RBA noted that uncertainty remained about the Chinese economy and conflicts in the Ukraine and the Middle East, while on Australian shores there could still be a lag in the impact of monetary policy. 

Returning inflation to target within a reasonable timeframe remains the Board’s highest priority,” she said. 

“This is consistent with the RBA’s mandate for price stability and full employment. 

“The Board needs to be confident that inflation is moving sustainably towards the target range. 

“To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”

Ms Bullock said the Board expected it would be “some time” before inflation remained sustainably in the target range.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out,” she said.

Geoff Lucas – The Agency

featured images website 2022 04 28T123404.899
The Agency Managing Director and CEO Geoff Lucas.

The Agency Managing Director and Group Chief Executive Officer Geoff Lucas said today’s rates pause was to be expected and he tipped the status quo would remain throughout the remainder of 2024.

“Given the most recent economic data, I expect little to no change in interest rates for the balance of the calendar year,” he said.

“Although the most recent CPI appeared encouraging, services inflation is proving more difficult to budge than earlier expected. 

“As rents and energy prices comprise a substantial part of services inflation, upward price movements in each of these is expected to challenge further falls in inflation.”

Mr Lucas said July tax cuts were also expected to increase average spending power and this, coupled with increased government spending possibly outlined in the May Federal Budget, was likely to add further inflationary pressure. 

“Whilst it is likely the next move is most probably down, albeit very late 2024 or into 2025, there is a slight, but emerging risk that further inflationary impacts may necessitate a lift in rates before any cuts,” he said.

“The change in frequency of interest rate decisions will see the obsession around the RBA’s meetings reduce as they are no longer front of mind and, as a result, the driving force of property price changes are increasingly demand and supply as well as affordability. 

“These factors are creating unprecedented levels of difference in pricing movements within the many state, region and community markets.”

Mr Lucas said it had never been so critical to analyse specific markets rather than treat them as a whole.

“Perth, Adelaide and Brisbane all lead the way in terms of annual and quarterly price gains, and each of these markets has significantly reduced supply,” he said.

Mr Lucas said given unemployment and the continued cost of living pressures, combined with higher interes rates staying in place, he expected property prices to continue to soften and, while remaining positive, to grow less than they did in 2023.

“Lower price and interest rate volatility, together with renewed first homebuyer activity are healthy signs for the residential market and Australian homeowners,” he said. 

Rob Westwood – First National Real Estate

Rob Westwood
First National Real Estate National Chair Rob Westwood.

First National Real Estate National Chair Rob Westwood said the network was pleased to see rates remain at 4.35 per cent.

“Although we have seen a strong start to 2024’s property market, cost-of-living pressures continue to loom large in buyer’s minds, placing pressure on negotiations,” he said.

“This decision indicates the Reserve Bank’s cautious approach to balance economic growth and inflation, providing stability for borrowers and investors in the property market.”

Nerida Consibee – Ray White Group

Nerida Conisbee
Ray White Chief Economist Nerida Conisbee.

Ray White Group Chief Economist Nerida Conisbee said today’s hold was expected and there continued to be speculation as to when the first interest rate cut would come.

Ms Consibee said inflation was coming down “far quicker” than was expected at the end of last year, but what happened over the coming months, and the timing of data releases, would influence when the cut would arrive.

“At the end of November, the ASX 30 Day Interbank Cash Rate Futures index was pricing in another rate increase in February, which obviously never occurred,” she said.

“Once December inflation was released, the outlook changed dramatically and the index is now pricing in cuts in September 2024, February 2025 and August 2025. 

“While markets are timing a cut in September 2024, the timing of the release of quarterly inflation data is also likely to play a role. 

“Monthly inflation is currently at 3.4 per cent. 

“While this is very close to the RBA’s inflation target of between two and three per cent, it is likely that they will wait for March 2024 quarterly inflation.”

Ms Conisbee said that data would drop on April 24 and, if it did come in at below three per cent, the earliest the RBA would likely cut rates would be on May 7.

“Continued weakness in the economy may be another catalyst for a May cut, even if inflation isn’t quite at below three per cent,” she said.

“GDP growth came in at a weak 0.2 per cent for the December quarter. 

“While we aren’t quite headed for recession, it does show that the brakes are on economic growth. 

“So much so that at a parliamentary hearing in Canberra last month, Michelle Bullock, the RBA Governor, stated they may cut rates before inflation hits below three per cent.”

Mathew TIller – LJ Hooker Group

Matthew Tiller
LJ Hooker Group’s Head of Research Mathew Tiller.

LJ Hooker Group Head of Research Mathew Tiller said today’s decision to keep the cash rate unchanged would reassure mortgage holders that the RBA has likely completed its extended cycle of increases resulting in more stable conditions.

Mr Tiller, said demand for property, particularly in the more affordable markets, was driving activity and growth in most capital cities and regional areas.  

Strong auction clearance rates have continued during the past month, averaging above 70 per cent in Sydney and 65 per cent in Melbourne and are further evidence of buyer demand. 

“Everyone is looking for affordability at the moment and this is boosting the middle to lower priced end of the market,” Mr Tiller said.

“The rental market remains tight and that is motivating some renters, who have saved a deposit, to make the transition to home ownership. 

“This price point also encompasses first home buyers, investors and even downsizers so there is solid competition in this segment.”

The RBA’s decision to keep interest rates unchanged at 4.35 per cent was not unexpected given a cooler economy along with reduced inflation and cost of living pressure easing. 

Mr Tiller said listings were up on this time last year, even with an earlier Easter, as homeowners looked to capitalise on the price growth to downsize or upgrade, with predictions of a steady autumn market ahead.

“Those who are continuing to struggle with higher interest rates are also looking to list because they are more comfortable doing so now that we have seen prices rise for 13 consecutive months,” Mr Tiller said.  

“The longer the RBA holds rates steady, the more confidence people will have they are not going any higher. 

“People will be comfortable within their household budgets and repayments, particularly as wage growth outpaces inflation – so as we get further to the second half of the year and there is more talk of rate cuts that will boost confidence and sentiments from both buyers and sellers.”

Eleanor Creagh – PropTrack

Eleanor Creagh
PropTrack Senior Economist Eleanor Creagh.

PropTrack Senior Economist Eleanor Creagh said today’s rate hold likely indicated that the cash rate had peaked in its current tightening cycle.

“This sustained pause reflects the continued easing of inflation pressures while the economy, businesses, and consumers are adjusting to the full impact of significant interest rate tightening delivered since May 2022,” she said.

“Home prices in 2023 remained resilient to the higher interest rate environment and the improvement in conditions that materialised through 2023 has continued in 2024.”

Ms Creagh said the year had kicked off with a flurry of activity, and more homes hitting the market than usual in Sydney and Melbourne, which has given buyers more choice.

“Demand has kept up with that increase, with many anticipating that interest rates will fall in the second half of 2024, likely providing a positive tailwind for activity,” she said.

“The decision by the Reserve Bank to hold the cash rate steady in March will maintain both buyer and seller confidence.” 

Ms Creagh said the next interest rate move would likely be a drop.

“Despite a weaker outlook for the economy, the positive tailwinds for housing demand and a slowdown in the completion of new homes are likely to offset the impact of reduced affordability and a slowing economy,” she said.

“As a result, prices are expected to lift further in the months ahead, particularly while the expectation remains that interest rates will move lower in late 2024.”

Graham Cook – Finder

Finder Head of Consumer Research, Graham Cook said while consumers had reported that their financial strain had diminished on average, many experts warned headwinds were still to come.

He said as rates remained steady, strapped households were eagerly awaiting a reduced mortgage payment. 

“This welcome news comes after a prolonged period of financial strain, but many homeowners are hoping for a lower cash rate,” he said.

“The next few months will be crucial in determining the trajectory of future interest rates.”

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