Rates on hold amid warnings housing boom could delay cuts

The RBA on Tuesday left the cash rate unchanged at a 12 year high of 4.35%, noting higher interest rates are working to get inflation lower, while the tight labour market continues to ease gradually.

In a media conference after the decision, RBA governor Michelle Bullock played down the prospect of an imminent rate cut, not ruling out one more hike if inflation fails to return to its 2-3% target band in a reasonable timeframe.

The RBA has held interest rates steady in March as eyes turn to the timing of the first rate cut. Picture: Getty

---

"We still have to get inflation down, and the risks to achieving that remain finely balanced," Ms Bullock said. "The war isn't yet won so we continue to be vigilant and we can't rule anything in or out.

"We're not confident enough to say we can rule out further interest rate changes, but we do think that we are on the path to get ourselves back to inflation within the target within our forecast period."

But economists and financial markets see another hike as unlikely, with a consensus view that the cash rate has already peaked.

Market pricing suggests the first rate cut is expected from late September.

Housing a potential plot ‘twist’

Incoming personal income tax cuts and the May federal budget have been flagged as potential inflation drivers, but HSBC chief economist Paul Bloxham says the housing market is shaping up to be a critical factor in the path for interest rates.

While the RBA does not target house prices specifically, Mr Bloxham said it would not want to fuel a market that is already heating up.

“Although some households have come under pressure from higher interest rates, which has boosted listings, housing demand still appears to be strong relative to supply,” Mr Bloxham said.

Australian property prices have reached an all time high nationally, which could pose a problem for the RBA. Picture: Getty

---

“Expectations for rate cuts are also fuelling rising housing prices. However, the twist in this story is that the more and faster that housing prices rise, the less likely it is that the RBA will cut rates anytime soon.”

He said a tight housing market with rising housing prices and rents is not the typical recipe for rate cuts, forecasting the RBA to remain on hold until at least 2025.

It comes as recent PropTrack data shows a reacceleration of market activity into the new year, with national property prices rising 0.5% in February to reach an all time high.

PropTrack senior economist Eleanor Creagh said home prices have defied higher interest rates, with buyer demand keeping pace with an increase in supply.

“This year has kicked off busily with more homes hitting the market than usual in Sydney and Melbourne, giving buyers more choice,” Ms Creagh said.

“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.

“The decision by the Reserve Bank to hold the cash rate steady in March will maintain both buyer and seller confidence. Looking ahead, the next move for interest rates is likely to be down.”

She said home prices are expected to lift further in the months ahead as buyers and sellers feel more certainty around the outlook for interest rates.

Lenders position for cuts

With eyes now turning to the timing of the first rate cut, Mortgage Choice data shows borrowers aren’t taking any chances when it comes to missing out on potential savings.

Home loan submission data for February shows that just 2% of loans submitted had a fixed component, with most customers opting for variable rate home loans to avoid being locked in to a potentially higher rate once the cuts begin.

Available data for March suggests this trend in borrower preference is set to continue, according to Mortgage Choice.

It comes as more lenders take a knife to their fixed term mortgage rates, with many offering fixed rates below 6% in line with some competitive variable home loans on the market.

Mortgage Choice chief executive Anthony Waldron said the RBA’s decision to leave rates on hold was not surprising given the recent string of economic data.

“The economy is slowing, annual inflation is at the lowest level seen since November 2021, and households are cutting back on spending, suggesting that high interest rates are having the intended effect,” he said.

“While the signs point to a rate cut later this year, there’s no way to predict exactly when a cut might occur.

Mortgage Choice CEO Anthony Waldron. Picture: Mortgage Choice

---

“I’d encourage borrowers to take control of their home loans now, rather than wait and see.”

Economists at the major banks anticipate the first interest rate cut could come in the second half of the year as inflation continues to move towards the top end of the 2-3% target range.

After peaking at 7.8% in December 2022, the annual rate of inflation had fallen to 4.1% at the end of 2023.

Addressing an event in Melbourne on Tuesday, Westpac chief economist and former RBA assistant governor Luci Ellis said September appears the most likely date for the first cut.

“We expect them to be on hold until September because that's when they have the full suite of data for the first half of 2024, and they'll have enough assurance that inflation is indeed on the trajectory that they want it to be,” Ms Ellis said at a Urban Development Institute of Australia (UDIA) conference.

“We are reasonably confident that absent some additional shock that we haven't seen yet, inflation will decline into the RBA’s 2-3% inflation target range towards the end of [next] year.”

Westpac chief economist and former RBA assistant governor Luci Ellis expects the first interest rate cut in September 2024. Picture: UDIA

---

Analytics group BIS Oxford Economics estimates homeowners will get almost $700 a month back into their budgets by the second half of 2026, based on forecasts of a 1.75 percentage points reduction in interest rates over 18 months.