The Reserve Bank of Australia (RBA) has not ruled out future interest rate increases despite “encouraging signs” inflation is tracking towards its target band of 2% to 3%.
Recently released minutes from the RBA’s December board meeting revealed the central bank board was considering two options: keeping the official cash rate at 4.35% or hiking it by 25 basis points to 4.60%.
Fortunately for borrowers, the central bank chose the former, with the cash rate staying put after five increases throughout the year.
However, the RBA added a caveat about possible future rises: “Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks,” the RBA meeting minutes said.
Aussie mortgage broker Phillip Stewart (pictured above) reacted to the RBA’s comments, saying that the consistent rate rises meant it was a big year for the mortgage industry.
“In the same timeframe almost half of our fixed rate customers have rolled off their rate, leaving them on a much higher rate than the originally signed up for,” Stewart said.
“The great news for many of our customers is that we’ve been able to work with them as they roll of to get them a better deal – whether with their existing lender, or a new one.
“It’s been a real pleasure to be able to alleviate some of that stress for my customers and help them to free up more cash in their budgets.”
Going into the December decision, the RBA noted that the “limited economic data” received beforehand had been broadly expected.
Inflation continued to track down from its December peak of 7.8%, dropping to 4.9% for October, however, this was still higher than the RBA would like.
Wages growth had reached 4% “a little sooner” than had been expected, but the RBA said that was unlikely to rise much further.
Output growth continued below trend and the labour market was tight, however, the board emphasised that financial stability concerns didn't influence their decision.
The RBA board also considered the financial context both domestically and abroad.
Globally, interest rate expectations in other countries fell while holding steady in Australia. Bond yields dropped, suggesting markets believed current policies can tame inflation.
In Australia, interest payments as a percentage of income are much higher for Australian households compared to recent times, although they are yet to reach the peak of 2008.
The case to raise the cash rate target by a further 25 basis points was centred on inflation persisting above the target range, with the potential for it to linger.
Inflation was increasingly being driven by domestic demand and underlying inflation was higher in Australia than several other countries.
“Furthermore, domestic demand was judged still to be running above the level consistent with the inflation target and growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined,” the RBA meeting minutes said.
The board also expressed its concern that, according to recent forecasts, inflation would only return to under 3% by the end of 2025, which is slower than desired.
The case to pause the cash rate largely relied on the fact that the RBA had limited data and the possibility that another rate rise could result in more unemployment.
Under this scenario, the RBA was balancing the risks of slowing demand and declining inflation, rather than just focusing on bringing inflation down towards the target band.
Members observed that monetary policy was working to bring demand and supply into closer alignment.
RBA board members also noted that the pace of disinflation in some other countries over recent months had accelerated.
“If emulated in Australia, this would be helpful in bringing inflation back to target,” the RBA meeting minutes said.
After weighing up these two options, members agreed that the case to leave the cash rate target unchanged at this meeting was the stronger one.
Members agreed there was enough value in waiting for further data to assess how the balance of risks was evolving and how best to balance these risks when setting policy.
Given the tightening cycle Australia has had with interest rates, this environment is unique, according to Stewart.
“We haven’t had it for 12 years and will take some time before we see the pressure ease,” Stewart said. “Some economists predict more rate rises, while others predict continued drops which tells you it will be a year of uncertainty for many households.”
What’s most important for borrowers, according to Stewart, is that they recognise how a home loan should never be a “set and forget option”.
“Just like any other household expense it should be regularly reviewed, and Aussie recommends every six months as a minimum. It’s never been more important to stay close to your broker and revisit your options on a regular basis,” Stewart said.
“Whether you’re considering refinancing, or purchasing your first property, it’s likely that your options will change over the course of the year as rates rise or fall. Even in a high-rate environment there can still be alternative ways to save on your repayments.”
What do you think about the RBA’s reasoning? Comment below.
