RBA lets home loans breathe by holding interest rates again in August

Relief for home loans continues this month with another rate hold from the Reserve Bank of Australia (RBA). For now, the cash rate will remain at 4.10% – its highest level since 2012.

This is the first time since early 2022 that the RBA has held interest rates steady for two months in a row, suggesting the cash rate is now high enough to fully wring inflation out of the economy.

In a post-meeting statement to the press, current RBA governor Philip Lowe explained that the cash rate has been achieving its inflation fighting goals, with more tightening yet to flow through due to the cash rate’s delayed effects on home loans and businesses.

“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month,” says Lowe. “This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”

This is the first time since early 2022 that the RBA has held interest rates steady for two months in a row, suggesting the cash rate is now high enough to fully wring inflation out of the economy.

Indeed, not even the RBA expected disinflation this steep. Last week, the latest quarterly Consumer Price Index revealed that goods and services only rose 6.0% in Australia year-on-year, a marked improvement from the previous quarter’s 7.0%. 

While this is still too high to tolerate for long, analysts heavily speculated whether the slowdown proved meaningful enough for the RBA to ease off the brakes. Many still expected an August RBA rate hike, including three of the Big Four banks. 

However, to the relief of mortgage-stressed borrowers everywhere, the RBA held firm to its course, content that it has done enough to raise the cash rate for the time being. 

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow,” says Lowe, though some uncertainties remain over the purchasing power of budget-stressed households.

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

Lowe, whose term as RBA governor ends in September, left room for future rate hikes in his statement – a tightening bias that has dogged this aggressive and unprecedented rate cycle. 

However, appetites for stronger monetary policy seem sated, especially amidst staunch criticism from government ministers and consumers struggling with the rise in housing costs. 

“Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” explains Lowe.

“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.”

This could mean 4.10% is as high as the official cash rate will go. Indeed, ANZ believes it is, as the big bank revised its forecasts last month after the July hold.

A rate hold renews speculation over potential rate cuts. Right now, monetary policy is in contractionary territory, meaning it is restrictive enough to shrink economic growth. If left too high for too long, there’s a looming possibility of a recession as growth utterly collapses.

The RBA will have to walk back interest rates to neutral territory before this happens, usually once inflation hits the top of the target band at 3%. 

At the moment, most forecasts peg inflation to slow to acceptable levels by mid-2024 at the earliest, or 2025 at the latest. If this proves true, we’re at least one to two years away from home loan interest rates falling to more affordable prices.

Fixed-rate home loans are the ones most likely to change during a rate pause. Lenders change their fixed rates to price in future rate expectations, making them a reliable bellwether for the path of interest rates. Longer terms may come down in August as lenders revise their rate forecasts, but this isn’t guaranteed.

Indeed, fixed rates were quickest to rise during the July rate hold, jumping between 15 to 65 basis points. A small handful of variable rate home loan changes came through during the April and July rate holds, as well, so calm doesn’t necessarily mean quiet.

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

For more information on how Reserve Bank decisions affect mortgages, head to our RBA rate tracker page.