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RBA hikes interest rates on Cup Day: What are the RBA and the banks saying?

November 7, 2023

RBA hikes interest rates on Cup Day: What are the RBA and the banks saying?

It would be quite the viewership battle if the RBA rate decision was televised during Cup Day. After all there’s probably more mortgage holders than horse racing punters in Australia, albeit maybe only by a fine margin.

But while those at Flemington were hoping they could cash in to somewhat offer the 400 basis point hikes by the RBA since May 2022, the RBA were once again raising rates around 870 kilometres away at their HQ in Sydney’s Martin Place. 

After four months of the official cash rate being paused, Michele Bullock, at just her second meeting since taking the reins from Philip Lowe who is no doubt telling everyone who will listen that it’s not that easy being Governor, hiked rates to a 12-year high of 4.35%

The Cup Day meeting has indeed been the most popular meeting in the calendar for rate hikes in history. This is the eighth time since 1990 the RBA has hiked rates on the first Tuesday of November.

Nobody had forecasted a rise a month ago. In fact, everyone was talking when the first cut would be. However higher than expected inflation, paired with Bullock’s minutes from the October meeting where she stated “the Board has a low tolerance for a slower return of inflation to target than currently expected,” had experts and economists quickly change their forecasts.

While it’s important to what economists and experts are saying about the economy and how they predict interest rates are, they also just change their mind when new data comes out that they’ve forecasted incorrectly. Nobody should be buying property based on an economist's view of when interest rates are going to go down.

One buyer's agent once commented that if economists correctly forecasted interest rates and how the economy was going to pan out, they wouldn’t need to be economists, they’d be millionaires. 

We will however endeavour to pick through the messaging from the RBA, and a full sweep of what experts are saying, so both homeowners and prospective homebuyers can make an informed decision about their property journey.

What did RBA Governor Michele Bullock say at the November meeting?

Accompanying every rate decision is always a statement from the Governor. While the statement is considerably more in depth, there are often a few clues to take away from the statement as to what the RBA is thinking. It might just be a turn of phrase, or the removal of an adjective. In this case however, Bullock gave what people in the media would call a tell-all interview.

She got straight to the point after announcing the rate increase.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” the statement read. That was compared to last month where Bullock said “Inflation in Australia has passed its peak but is still too high and will remain so for some time yet.”

Bullock also surprisingly revealed the RBA’s upwards revision of inflation over 2024, from 3.3% to 3.5%.

Bullock said that since its August meeting, the Board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased.

“While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3.5% by the end of 2024 and at the top of the target range of 2 to 3% by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

Bullock said that while the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. 

Channelling her inner Philip Lowe, Bullock concluded the statement by saying returning inflation to target within a reasonable timeframe remains the Board’s priority. 

“High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.”

Bullock concluded the statement by saying “data and the evolving assessment of risks” will dictate whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe.

For the full statement from the RBA, click here.

What’s happening with inflation?

All was well in the world of inflation following the June quarter when it softened significantly. Inflation rose in the June quarter by 0.8%, well down from the 1.3 per cent in the quarter prior. September however threw a spanner in the works for the RBA and therefore variable mortgage holders in the country. 

The Consumer Price Index, or CPI, the official term for inflation rose 1.2% in the September quarter. Experts had predicted a 1.1% rise. Annually inflation is still trending down, having hit a 30-year high 7.8 per cent in the December 2022 quarter.

The headline CPI annually in the September quarter was 5.4%, down from the 6% in the June quarter. It had been at a peak of 7.8% in the December quarter. Despite the decline annually, the problem is the speed at which inflation is coming down to the RBA’s target range of 2 to 3%. 

The inflation spike was driven by a 7.2% rise in fuel costs, after two quarters of price falls. It was the largest quarterly rise in fuel prices since March 2022. The persistently high fuel costs are down to higher global oil prices. 

Also driving inflation were electricity, up 4.2%, rents up 2.2%, and new dwellings purchased by owner occupiers up 1.3%. A 0.6% rise in food was the softest quarterly rise since September 2021. The rise was driven by meals out and takeaway foods, up 2.1%. Fruit and vegetable prices were down 3.7% over the quarter.

What the banks are saying

The inflation figures released in late October triggered a chain reaction of banks, economists and commentators changing their forecasts. All four of the Big Four banks had expected a hold, but quickly changed their mind following the inflation data.

ANZ initially said a 1.2% inflation rise would be “uncomfortable for the RBA”.

“We had been highlighting the risk that the Bank could act either late this year or early next, and we now think it more likely than not that risk will be realised,” ANZ’s Head of Australian Economics Adam Boyton said. They did highlight that the November meeting would be the one to watch for another hike.

ANZ has again reiterated that they now expect an “extended pause”, however they have left the door open for another rate hike, which is probably smart considering no one seems to know which way inflation is heading.

“While 4.35% should mark the peak in the cash rate, there is a risk it could tighten beyond that,” Boynton said, adding that any easing remains a very long way off.

Westpac’s new Group Chief Economist Luci Ellis, who previously spent 15 years at the RBA as the head of the financial stability department and then the assistant governor (economic) before joining Westpac last month, said she’d seen enough in late October to make her first-ever rate call to be a prediction of a hike.
“We assessed that it would take a significant upside surprise to induce the RBA Board to raise rates at the November meeting. A 0.1% difference might not seem like a lot, but the underlying detail was sobering.

“In August, the RBA expected that the trimmed mean rate of inflation would reach 3.9% over 2023. That seems a long way out of reach now: the December quarterly result would have to print at 0.5% for this to happen. 

Following the announcement, Ellis said “follow-up increases in rates are far from assured.”

“We do not expect that the RBA will follow up with another rate increase in December. There is not enough new information between now and the December meeting to drive a change in view.”

Ellis said that while a December move is unlikely, it is more likely that the February meeting would become ‘live’ if the inflation outlook continues to lift.

Westpac also expects the rate rise to be the final one. They’ve now pushed their first rate cut out, expecting it to come in the September quarter. They expect cuts in each of the three quarters to June, which would bring the cash rate down to 3.35%.

NAB Chief Economist Alan Oster expected an increase. He expects cuts to happen late next year due to a higher unemployment rate.

Commonwealth Bank, the nation's largest lender, hasn’t updated what they think moving forward, however their chief economist Stephen Halmarick said last month that “by the time we get to the November and December RBA Board meetings we expect to see a further weakening in domestic consumer spending and a slowdown in the pace of global economic growth; keeping the RBA on hold into 2024.”

What are the experts saying?

In this month’s Finder RBA Cash Rate Survey, over two thirds of the 45 experts and economists surveyed forecasted a rate hike. 

AMP Capital Chief Economist Shane Oliver called the increase.

“Underlying inflation for the September quarter came in well above RBA forecasts, likely resulting in a “material” increase in RBA inflation forecasts for which it has indicated little tolerance. That said, it's a close call given political pressure, the absence of an RBA deputy on the board at present and our own view is that they should hold.”

Cameron Kusher, REA Group Executive Manager of Economic Research, said inflation is not falling in line with RBA forecasts and after having talked tough on the RBA's preparedness to lift rates if required, the new RBA Governor would look weak if we didn't get a rate hike on the back of the latest numbers.

What’s happening to house prices

CoreLogic’s monthly Hedonic Home Value Index posted 0.9% gains in October, the seventh consecutive month of value gains nationwide. 

South East Queensland continues to dominate growth, with Brisbane going past its prior peak. After 1.4% gains across the combined house and unit market, Brisbane wiped out its 8.9% contraction over 2022 to reach a new record high. 

Brisbane units were up 1.3% over October to a median $545,000, while houses were up to a median of $860,000 after 1.4% gains. 

The Gold Coast has also been a consistently strong performer, one of the best in the country for both houses and units. House values rose by 1.2% in October to be 7.3% up over 2023, while units jumped 1.6% over the month to be 8.8% higher than they were at the start of the year.

Speaking nationally, CoreLogic’s Research Director Tim Lawless says the rate hike is set to take the heat out of the housing market.

“A rebalancing between buyer demand and advertised stock levels is likely to take some heat out of the housing upswing, which has already been losing some momentum, at least at a macro level, since the monthly rate of value growth peaked in May.”

Lawless notes however that while growth in housing values is likely to slow further, it’s hard to see prices going backwards over the near term. 

“A shortage in housing supply, record low vacancy rates and a lagged flow through to purchasing demand from record levels of overseas migration should help to keep some upwards pressure on home values.”

PropTrack Senior Economist Eleanor Creagh also suggested the additional increase in interest rates may slow the current pace of home price growth, but is unlikely to deter these gains, with strong population growth, tight rental markets and a housing shortfall fuelling further price rises.

“The PropTrack Home Price Index shows that the home price rebound is firmly established, with prices hitting record highs in many markets in October. National home prices reclaimed 2022’s price falls in their entirety last month, with the upswing continuing in October.” 

“Record levels of net overseas migration, a challenged rental market, limited housing stock and a slowdown in the completion of new builds are offsetting the impacts of substantial rate rises and the slowing economy, with home prices continuing to lift.”

What data comes out in November?

Friday the RBA will release their Statement of Monetary Policy which will talk more to the upwards revision of their inflation forecasts, as well as their unemployment forecast for the end of 2025 which has been revised down from 4.5% to 4.25%.

The RBA will be looking at the regular monthly releases throughout November before the December meeting.

There’s the monthly CPI update, which doesn’t hold as much importance as the quarterly  because not every category has price updates month on month. The monthly indicator was brought in so the RBA could get a more frequent update on inflation and act accordingly if necessary. Those figures are out November 29.

Labour force data, which will include the current employment rate, is out November 16, a day after the wage price index. 

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