Blue Christmas for borrowers as interest rates are held at 4.35%

While economists had been losing confidence on the possibility of a cut, mortgage holders across Australia have been holding onto some hope that they would see even a small amount of respite before Christmas.

Following the RBA board’s final meeting of the year this week, it was today confirmed that cash rate will remain unchanged for a 14^th consecutive month while core inflation continues to remain high.

REA Group senior economist Eleanor Creagh said underlying price pressures, stickier components of inflation, and a resilient labour market have prevented an interest rate cut this year. 

Reuters' panel of 44 economists were unanimous in their expectation for the cash rate to be held today, while three of the big banks expect relief to be held off until well into next year.

Governor Michele Bullock says the bank is continuing to target a sustainable return to inflation as its key priority. Picture: News Corp Australia

ANZ, Westpac and National Australia bank are currently forecasting a first rate cut in May, while Commonwealth Bank is sitting more optimistically to a February expectation.

Ms Creagh agreed rates were likely to stay on hold in the first quarter.

“This is unless there is an external shock or significant shifts in unemployment or underlying inflation, as it aims to sustainably return inflation to target,” she explained.

“Households remain under pressure and consumers remain cautious, choosing to save a large portion of July’s tax cuts. Although employment growth continued and the unemployment rate held steady at 4.1% in October, the labour market has softened over the past year. Slowing employment and inflation may prompt rate cuts from May 2025.”

In a statement on monetary policy today, the RBA confirmed inflation is still too high to consider a cash rate cut.

REA Group senior economist Eleanor Creagh says the cash rate is likely to stay at 4.35% until at least May. Picture: Supplied

"The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint."

In a press conference following the cash rate announcement, governor Michele Bullock said cost of living pressures remain a burden on all Australians, adding the board had not explicitly considered any option other than a rate hold this month.

"We haven’t had a sustained period of high inflation for more than 30 years. It’s not familiar to people," she said. "The high inflation over the last couple of years has permanently increased the price level."

The inflation battle

Steady progress on curbing headline inflation in the last few months has been taken as positive news for the future of interest rates. After peaking at 7.8% in late 2022, inflation sunk to a three-and-a-half year low of 2.8% in September.

The RBA’s preferred measure of the state-of-play, core inflation, remains outside its 2-3% target range. The trimmed mean number came in at 3.5% in October, up from 3.2% in September and on the back of seven consecutive quarterly falls.

Mortgage Choice chief executive Anthony Waldron said the cash rate hold was “not the festive season gift borrowers were hoping for” but had not come as a surprise.

“It follows a warning from governor Bullock that recent falls in headline inflation may be short-lived due to federal government rebates that have kept the price of energy bills low and put downward pressure on inflation,” he said.

“Until the Reserve Bank is satisfied that inflation can stay within its target of 2-3% over a sustained period, households will have to hold out for the long-awaited cash rate cut.”

Housing and home financing

After a slow year for refinancing in 2024, Mr Waldron said the stagnant rate environment is finally leading to an uptick in interest.

“In a sign that some households have grown restless with current interest rates remaining high, Mortgage Choice home loan data reveals a 3% month-on-month increase in the proportion of refinance submissions during November,” he confirmed. “This represents the greatest percentage of refi submissions all year as borrowers seek cost of living relief.”

That relief may be further away than previously thought however, with rate cuts largely not expected until April at the earliest.

House price growth across the country has slowed slightly, with the latest PropTrack Home Price Index showing a 0.15% lift in November.

Last month saw the national median home value hit $800,000 for the first time – a new peak on the back of 23 consecutive months of growth.

“While a rate cut may not happen until well into next year, there's plenty you can do now to achieve your home loan goals in 2025,” Mr Waldron said.

While home price growth is currently slowing, it is expected to gain momentum once interest rates begin to fall, though the timing of rate cuts remains uncertain.

“The increase in properties hitting the market this year has been met with strong demand, but increased stock for sale has been a contributor to slowing price growth, along with affordability constraints and the sustained higher interest rate environment,” Ms Creagh said.

“In the months ahead, home prices are expected to lift, though the pace is expected to remain softer trailing the strong growth in prices over recent years.”

If conditions warranting rate cuts emerge in May 2025, improving affordability and buyer confidence are expected to drive renewed demand and price growth through the second half of the year.

“Whether you’re thinking about finding a better rate on your current home loan, or you’re planning to buy in the new year, your mortgage broker can help you put your best foot forward,” Mr Waldron said.

New decision makers

The RBA will make its next decision on the cash rate in February – the first under its new split board structure that successfully passed through the Senate at the end of last month.

Mortgage Choice chief executive Anthony Waldron says refinancing is beginning to pick up after a slow 2024. Picture: Supplied

Amendments to the Reserve Bank Act will see one board focused on monetary policy and interest rates, while another board will manage the overall governance.

Speaking at a recent Committee for Economic Development of Australia in Sydney, Ms Bullock said the “substantial amount” of work that comes with managing the bank’s operations will no longer be her responsibility.

The decision to split the board comes off the bank of an independent investigation into the RBA in 2023, in which the existing board faced criticism for a perceived lack of rigour in questioning the governor’s interest rate decisions.

As we close out 2024, all eyes will turn to the numbers in the Australian Bureau of Statistic’s next inflation data publications.

"I don’t want to give the impression we react to one number and one number only. Between now and February there is going to be a quarterly inflation print but there’s also the monthly one. They are very volatile," she said. "There is going to be a couple of labour market indicators as well, and some consumption indicators. All these things are going to be important when thinking about how the economy is going."

The next monthly figures are expected on 8 January, followed by December quarter figures on 29 January.