Philip Lowe’s parting gift to borrowers: RBA leaves interest rates on hold at 11-year high

At its September board meeting — Mr Lowe’s last as governor — the RBA kept the official interest rate unchanged at 4.1% with recent data confirming inflation has fallen faster than expected.

The monthly Consumer Price Index for July showed a further decline in the annual rate of inflation to 4.9%, which is still above the RBA’s target range of 2-3%, but ahead of expectations. 

"Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline," Mr Lowe said in a post-meeting statement. "But inflation is still too high and will remain so for some time yet."

"The central forecast is for CPI inflation to continue to decline and to be back within the 2-3% range in late 2025."

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks."

PropTrack senior economist Eleanor Creagh says slowing momentum in inflation and consumer spending has eased pressure on the RBA, as it tries to avoid a recession whilst returning inflation to the target range. 

"The high level of inflation, which has challenged the Australian economy and seen interest rates rise at the fastest pace in a generation, continued to moderate faster than expected in August, the third straight monthly slowdown," Ms Creagh said. 

The Reserve Bank of Australia kept the cash rate steady at 4.1% at the last board meeting of governor Philip Lowe's term. Picture: Getty

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It was widely expected the cash rate wouldn’t change at Mr Lowe’s last meeting as RBA governor, with his seven year term coming to an end this month and deputy governor Michele Bullock taking over the top job on September 18.

Rates rose to an 11-year high during the final year of Mr Lowe’s term, with 400 basis points of hikes lifting the cash rate from record lows during the pandemic to a level the RBA has described as "clearly restrictive".

Borrowers are now cutting back on spending as mortgage repayments rise and low-rate fixed loans expire and revert to much higher variable rates.

"The substantial tightening previously delivered is weighing on economic activity," Ms Creagh said.

"Consumer spending is slowing, and conditions are expected to soften in the coming months as economic activity continues to slow.

"The full impact of the tightening already delivered is yet to be felt and we’re likely to continue to see inflation moving lower as a result."

Sellers increasingly confident heading into spring

Despite high interest rates restricting borrowing capacities, home values have risen steadily since the start of the year and prices have reached record highs in some cities amid tight conditions.

"The majority of home price falls recorded last year have been reversed in 2023, with August marking the eight consecutive month of national home price growth," Ms Creagh said. 

"Strong demand and limited supply have offset the impact of rate rises that continued this year."

Sentiment towards selling has significantly improved, REA Group's recent Residential Audience Pulse survey found, with a growing proportion of optimistic homeowners citing high buyer demand and a lack of competition as the reasons they believed it was a good time to sell.

Sellers have become increasingly active in recent months, and more properties than usual have hit the market in Sydney and Melbourne as confident vendors look to get ahead of the spring rush.

The RBA’s latest hold is expected to add further momentum as the property market gathers steam into spring, with increased certainty around borrowing costs and buoyant market conditions encouraging people to transact.

"The decision by the Reserve Bank to continue holding the cash rate steady in September is likely to maintain both buyer and seller confidence as the spring selling season begins, with home prices likely to continue lifting in the period ahead," she said. 

How home prices changed around the country in August

Home prices increased in most parts of the country in August, with prices reaching record highs in Brisbane, Adelaide, and Perth as well as regional Queensland and South Australia.

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Mortgage Choice CEO Anthony Waldron says demand is continuing to outstrip supply in Australia's biggest capitals, meaning buyers would need to move quickly to secure a property in a competitive market.

"This makes it even more important to have your finances in order," he said. "A mortgage broker can ensure you’re ready to make an offer with confidence."

High interest rates prompt record levels of refinancing

Borrowers have responded to materially higher interest rates by switching lenders in droves, with the latest lending data from the Australian Bureau of Statistics showing refinancing activity hit a record high in July.

The refinance rush coincides with the peak of the 'fixed-rate cliff', the period when the largest proportion of low fixed-rate loans expire, with some borrowers facing a steep jump in repayments as their loans switch to variable.

Meanwhile, younger homeowners in particular are beginning to experience increasing levels of mortgage stress, the REA Group survey of more than 4,500 consumers found.

Younger borrowers are more likely to be worried about rate rises, and more likely to have experienced issues meeting mortgage repayments.

Having owned property for less time than older cohorts, younger borrowers usually have less equity, and owners who stretched to purchase a property in the past few years are now likely paying significantly more in loan repayments than just a year ago.

Lenders’ interest rates have continued to climb, with the average variable rate for outstanding owner occupier loans rising to 6.24% in June, according to the RBA. 

Although the RBA hasn’t lifted the cash rate since June, there typically is a lag between changes to the cash rate and interest rates paid by borrowers, meaning borrowers’ interest rates could still rise further despite the cash rate remaining steady this month.

What’s next for interest rates under new RBA governor Michele Bullock?

Despite a widespread view that interest rates have peaked, Australia’s big banks are split over whether Ms Bullock’s first move as governor will, in fact, be a rate cut.

Commonwealth Bank and Westpac believe weakening economic data will prompt the RBA to begin lowering rates next year, tipping cuts to start in early and mid-2024 respectively. 

On the other hand, NAB expects a final rate rise in November this year before cuts in the second half of 2024, while ANZ doesn't expect another rise but isn’t ruling out the possibility of rates rising further if high inflation lingers.

Increase to monthly repayments since May 22:

Modelling from realestate.com.au shows a borrower with $500,000 outstanding on their mortgage would free up about $327 a month if the cash rate was cut from 4.1% to 3.1%, assuming their lender passes on any cuts in full.

Oringially published at: https://www.realestate.com.au/news/philip-lowes-parting-gift-to-borrowers-rba-leaves-interest-rates-on-hold-at-11-year-high/