The Reserve Bank (RBA) has opted to maintain the cash rate at 4.35% – a decision that came as no surprise to CoreLogic Research Director Tim Lawless and Finsure CEO Simon Bednar in light of subdued inflation figures reported for the December quarter.
The data, which fell approximately 45 basis points below RBA’s forecast, coupled with lackluster retail trade outcomes and tepid economic activity, provided a solid foundation for the hold decision.
And while RBA doesn’t directly target asset prices, Lawless (pictured above left) said the recent deceleration in housing value growth has been viewed as a positive outcome. The moderation in the quarterly change of CoreLogic's capital city Home Value Index from 3.9% to 1% over the past three months signaled a potential reduction in the “wealth effect,” which could have buoyed household spending.
Commenting on RBA’s hold decision, Lawless underscored the cautious stance of the RBA towards inflation outcomes, noting the possibility of further rate hikes.
“The RBA hasn’t explicitly ruled out further rate hikes, in fact noting ‘a further increase in interest rates cannot be ruled out,’” he said. “The RBA is taking a cautious approach towards inflation outcomes and ensuring any policy stance on the cash rate trajectory is tempered and data-driven.”
Lawless noted that this position is supported by the OECD, which cautioned against premature interest rate cuts.
According to OECD, it is crucial for monetary policy to “remain prudent to ensure that underlying inflationary pressures are durably contained,” and that while there may be room to decrease policy interest rates as inflation diminishes, “the policy stance should remain restrictive in most major economies for some time to come.”
Finsure CEO Simon Bednar (pictured above right), too, agreed that there remains a considerable distance before the RBA would consider lowering official rates – this despite inflation “heading on the right path,” decreasing to 4.1% over the past year.
“Inflation at 4.1% is a good sign but there is still a way to go before we hit the RBA’s target range of 2%-3%,” Bednar said. “I also think there are still external pressures in the economy which could create further inflationary pressures. This includes state-sponsored infrastructure, housing, energy and tax breaks, but I definitely think we are on the right path.”
The decision to maintain the cash rate follows a string of 13 increases initiated by the RBA since May 2022, when official rates stood at a record low of 0.1%.
Financial markets, however, are displaying a more bullish outlook, fully pricing in rate cuts by August and December this year, reflecting confidence in a potential policy shift by the RBA.
In line with the decision to hold rates, the RBA revised its inflation forecast downward in its Statement on Monetary Policy, indicating a possible rate cut later in the year.
Lower rates, combined with easing cost-of-living pressures and tax cuts, are expected to bolster borrowing capacity and consumer sentiment, potentially stimulating home purchasing activity, Lawless said.
Moreover, adjustments to APRA’s serviceability buffer, though not guaranteed, could further boost housing markets once the rate hiking cycle turns. These adjustments, if implemented, may include new policy mechanisms such as debt-to-income (DTI), loan-to-income (LTI), and loan-to-value ratio (LVR) limits aimed at mitigating housing credit risk.
The new year brought structural changes to RBA’s operations, with board meetings reduced from 11 to eight annually. Additionally, the timeframe for each meeting has been extended, allowing for more comprehensive deliberations on economic data.
The introduction of press conferences after each meeting enhances transparency in decision-making, while the forthcoming split of the board into two entities—one for monetary policy decisions and the other for governance—promises further accountability and diversity of perspectives.
There will also be anonymised voting outcomes from board decisions and increased involvement from a diverse range of board members in public engagements, CoreLogic reported.
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