RBA maintains heavy momentum by holding interest rates for July

After previously hinting at more rate hikes to come, the Reserve Bank of Australia (RBA) astonished home loan holders this week with another pause for this year. The decision leaves the official cash rate at 4.10% – its highest peak since 2012. 

While inflation remains high, RBA governor Philip Lowe explains the momentum behind rate hikes appears to be working. 

"Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so," explained Lowe.

"In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."

Indeed, the latest monthly Consumer Price Index from the ABS shows headline inflation slowed to 5.6% annually in May 2023. While this number is still above the RBA’s target band of 2 - 3%, the cooling proves meaningful enough to hold for now.

This decision usurps the hawkish mindset the RBA has taken lately, especially after housing prices proved undaunted by rate hikes. 

“The RBA’s probably at a point where they want to get more information about the increases they’ve added to rates this year,” explains Mozo banking expert Peter Marshall. 

“They will have to be aware that they’re at or very close to the peak of this rate cycle, and while they’ve said that they expect rates will have to go up more, I think they’ll be getting ready to make the call that, ‘No, no more is needed.’”

Indeed, if the RBA mistimes a pause to the cash rate, the consumers could receive the wrong message – as they did in April. 

“As much as we criticise the RBA, they have a really difficult job, and the pause in April did increase the expectation that there would be no more rate hikes – which made everyone go a bit crazy,” explains Marshall. 

“People were basically ignoring where rates were and getting on with borrowing lots of money.”

But now the economic cracks have started to show, and mounting evidence indicates the RBA may need to ease off the pedal or risk crashing.

“There are so many cracks appearing right now that indicate the economy is slowing,” says Marshall. “We’re more likely about to hit a recession, and that will see the rate increases stop.”

“With the lower monthly inflation figure and increasing unemployment, I think the RBA is getting its wishes, and the economy is coming to a halt.”

While this pause may present relief for homeowners and renters alike, the question remains if interest rates have peaked or if they have further to go.

Interest rates have leapt 400 basis points since May 2022, a clip unprecedented in the RBA’s history. 

Each decision sent waves throughout the mortgage market in particular, driving up monthly repayments by thousands of dollars. Now, the mean variable home loan sits at 6.54% in the Mozo database.

Because of the rate scramble, property prices plummeted in 2022 while rents skyrocketed thanks to cash-strapped landlords. Ironically, this has added pressure to the cost of living for many Australians already fighting price rises in necessities like food, petrol, and healthcare. 

Thankfully, most Big Four banks now predict we’ve entered a new era: the cash rate peak. If inflation continues cooling, the RBA may leave rates as they are before winding them back in 2024 to jumpstart the economy. After all, the central bank doesn’t want inflation to go too low – that could indicate an oncoming recession. 

So is 4.10% as high as rates will go for this cycle? Not quite. Lowe left room for future rate hikes in his post-meeting statement, though the appetite for immediate increases seems sated for now.

"The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks," explained Lowe.

"In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the forecasts for inflation and the labour market."

Two of the Big Four banks agree, forecasting a peak of 4.35% or 4.60%  in the next few months – which leaves room open for at least one more rate rise.

Despite having no additional pressure on their funding costs, many banks still made adjustments to their home loan products throughout the month of April. Most astonishingly, many lenders began slashing their fixed-rate home loan terms, indicating that they expect the cash rate to unwind sooner rather than later. 

With the cash rate holding steady again, we can expect more cuts to fixed terms while variable home loans plateau.

We’ll track which lenders have changed rates as word comes in. To see how your lender compares, visit our home loan comparison page.

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