It’s been a big week for Aussie home owners, as the RBA finally paused their aggressive interest rate hikes at the April meeting. The first time since May last year.
Governor Philip Lowe decided against hiking the official cash rate for the 11th consecutive month, keeping it stable at 3.6 per cent following a 3.5 per cent increase since May 2022.
The question now is, how long will rates be paused? We’ll take a look at the state of play following the April rate decision.
The first pause in the interest rate hike cycle was always going to make the meeting statement an interesting read. What will be even more interesting will be the minutes of the meeting, which are published on April 18 when the RBA disclose the conversations held in the lead up to the pause.
The meeting statement said the decision to hold interest rates steady “provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.”
It was noted, much earlier in the April statement than other months, that “The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt.”
No change in the inflation target from the RBA. Given Australia’s continued spending despite rising inflation, some property experts questioned whether we should just leave inflation high, as Australians seem to have adjusted to the new cost of living. The Reserve Bank of Australia does not agree with this opinion, as they believe that high levels of inflation make life more difficult for people, and can have a negative impact on the economy.
The Board is still seeking to return inflation to the two to three per cent target range.
The minutes of the March RBA meeting, which are always released two weeks after the rate announcement, also had a glaring omission which points toward the peak of the interest rate cycle.
For the February rate call, Lowe said The Board discussed whether they should raise rates by 25 basis points or 50 basis points (0.25 or 0.5 per cent). Those discussions were not held prior to the March rise, and will no doubt have been the first topic for the April decision, although the discussion would have been whether to raise the interest rate or not, rather than simply by how much.
Another interesting take away from the March minutes was that it read: “Members agreed to reconsider the case for a pause at the following meeting, recognising that pausing would allow additional time to assess the outlook for the economy.” That’s not been a part of Governor Lowe’s hymn sheet during this rate hike cycle.
Westpac’s Bill Evans believes that approach indicated a preference for pausing, which of course Lowe went on to action.
All eyes now turn to April 26 and the quarterly release of inflation figures (CPI). The CPI will be the deciding factor in the future of the official interest rate, and will form the RBA’s view as to whether they need to hike rates in May.
The RBA’s belief is that inflation peaked late last year. Based on the monthly CPI indicator, inflation is slowing faster than the RBA’s latest forecast. The Reserve Bank of Australia (RBA) forecasted annual headline inflation at 6.75 per cent for the June quarter.
The monthly inflation indicator showed that annual inflation had dropped to 6.8 per cent by the end of February.
Westpac are forecasting a trimmed median inflation of 6.6 per cent.
Should there be better than forecasted news in the CPI release, there may not be the need to raise rates again. Only a few days ago however, following his address to the National Press Club on April 5, Lowe said in a Q&A he “expects rates will increase again, but not 100% certain.”
The majority of economists have now amended their interest rate peak to 3.85 per cent, down from 4.1 per cent, which means just one more interest rate rise until we reach the top.
If 2022 was the worst year for variable mortgage holders, 2024 is forecasted to be a good one.
NAB believes rates will start coming down in the March quarter 2024, while ANZ are also targeting 2024 for the first rate cut, but later in the year.
Westpac are expecting a more aggressive approach from the RBA to rate cuts. They expect the first cut to happen by March, and by the end of 2024 they are forecasting the rate to be 2.85 per cent.
Less than 40 per cent of experts and economists surveyed as part of Finder.com.au’s RBA Survey accurately predicted the cash rate hold in April, the second-lowest percentage of correct predictions since May 2022.
The panel now forecast that the cash rate will peak on average at four per cent, with 70 per cent of those who weighed in saying it will peak between April and July this year.
Shane Oliver from AMP said after 10 rate hikes, it’s now time for a pause.
“Economic data is showing increasing signs of cooling activity and peaking inflation and banking turmoil has increased the risk of a global recession,” Oliver said.
CoreLogic Research Director Tim Lawless says the decision to hold sends a clear message the RBA is ready to take stock and assess the economic impact of the rapid rate hiking cycle.
“Considering monetary policy acts with a lag, it’s important to understand how trends in consumer prices, consumption, labour markets and sentiment are evolving as a result,” Lawless said.
Lawless says that while a pause doesn’t necessarily mean interest rate hikes are ‘done’, it is likely the tightening cycle is close to topping out.
“While the RBA has left the door open for further hikes, noting “…some further tightening of monetary policy may well be needed to ensure that inflation returns to target”, most forecasts have interest rates either at a peak or almost at a peak with one more hike in the wings.
Even before the RBA rate call, there was a lift in housing values over the last month or so. Over March, CoreLogic’s Home Value Index noted that national home values grew 0.6 per cent over February, ending 10 consecutive months of declines.
Tim Lawless stated that, while the March data is uncertain, it is evident that there are positive forces driving housing markets. These include low advertised supply, the tightest rental conditions on record, and surging overseas migration.
Whether the market has truly bottomed or not is up for debate, but what isn’t up for debate is the shift in mindset from buyers.
What buyers are now facing is an interest rate which is either at, or close to the peak. From that view, their repayments if they took on a mortgage now are likely to be the highest, or nearly as high, as they will be for a number of years.
Then there’s the aforementioned “bottoming” of the market. What that means is buyers are now buying an appreciating asset. There’s no second guessing when the market is going to bottom. The assets value may decline in the first few months if the market hasn’t truly “bottomed”, but the major declines are well gone.
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