Interest rates Australia: Reserve Bank leaves interest rates on hold in July at 4.35 per cent

The Reserve Bank has paused rate hikes for only the second time this year, but the relief is likely to be short-lived as inflation is still too high.

After the July board meeting during the school holidays, the cash rate remained unchanged at an 11-year high of 4.1 percent.

This was only the second monthly pause since April, with interest rates rising since May 2022 at their most aggressive pace since 1989 with 12 increases in 13 months.

Reserve Bank of Australia Governor Philip Lowe, whose seven-year term expires on September 17, hinted that this pause would likely be only temporary, following a spike in the consumer price index or headline inflation.

“Inflation in Australia has peaked and the monthly CPI indicator for May showed a further decline,” he said Tuesday afternoon.

“Some further monetary policy tightening may be needed to ensure that inflation returns to target within a reasonable time frame, but that will depend on how the economy and inflation evolve.”

Inflation slowed to 5.6 percent in May from 6.8 percent in April, but the annual rate was still well above the RBA’s target of 2 to 3 percent – with the RBA expecting CPI to rise through mid-2025 would remain high.

Annual payments on an average $600,000 mortgage are still $17,556 higher than they were 14 months ago, when cash interest rates were still at a record low of 0.1 percent.

Since then, variable mortgage rates have risen from levels starting with a “two” to a zone where even a borrower with a 20 percent down payment now pays 6.44 percent at the Commonwealth Bank.

In 2023, borrowers have so far only received a reprieve in January — a month when the RBA doesn’t meet, April and July, with the relief each time coinciding with school holidays.

The latest pause surprised the big four banks, all of which had expected a July increase.

But Westpac senior economist Matthew Hassan said the RBA is likely to raise rates two more times, bringing the spot rate to 4.6 percent.

“We think there will be two more rate hikes,” he told Sky News after the decision.

The 30-day interbank futures market also expects rate hikes in August and September that would push RBA money rates to the highest level since November 2011.

Dr. Lowe hinted that inflation could remain high – leading to another interest rate hike – if strong wage growth did not lead to productivity improvements, leading companies to pass the costs on to consumers.

Reserve Bank of Australia Governor Philip Lowe (pictured right with Deputy Michele Bullock), whose seven-year term expires September 17, hinted that this pause would likely be only temporary after a spike in the consumer price index or general inflation

“Wage growth has picked up in response to the tight labor market and high inflation,” he said.

At an aggregate level, wage growth is still in line with the inflation target, provided productivity growth picks up.

“The board remains alert to the risk that the expectation of continued high inflation will contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and still very low unemployment.”

Dr. Lowe said the 12 rate hikes since May 2022 are putting pressure on some borrowers, with his latest monthly statement no longer including reference to balancing the economy.

“The combination of higher interest rates and cost-of-living pressures is leading to a significant slowdown in household spending,” he said.

‘While house prices are rising again and some households have substantial savings buffers, others are struggling with a painful tightness in their finances.’

In June, house prices rose in every state capital except Hobart, with CoreLogic data showing Sydney’s values ​​rose two percent to $1.324 million.

Deloitte Access Economics partner Stephen Smith said government investment to boost productivity would be a better way to curb inflation than relying on the Reserve Bank to raise interest rates.

“Monetary policy is a used weapon,” he said.

‘We need to focus on fiscal policy, investment and innovation to increase productivity; competition policy to improve efficiency and erode market power; and fiscal policy to increase prosperity.’

Treasurer Jim Chalmers has indicated that he will announce this month whether Dr. Lowe’s term will be extended or replaced.

Michele Bullock, deputy governor of the RBA, Jenny Wilkinson, Secretary of the Treasury Department, and Steven Kennedy, Secretary of the Treasury, are considered the leading candidates.

The Reserve Bank expects economic growth – or gross domestic product – to halve from 2.7 percent at the end of 2022 to just 1.25 percent at the end of 2023 as a result of its rate hikes.

AMP chief economist Shane Oliver said interest rate hikes so far threatened to trigger a recession, a repeat of what happened in 1991 after interest rates hit 18 percent in 1989.

“If the economy were to slide into recession, the government would likely reduce immigration intake, further reducing the underlying imbalance between supply and demand,” he said.