RBA leaves interest rates unchanged at May meeting

Banks, aggregator share their views on decision as costs of petrol, services remain high

RBA leaves interest rates unchanged at May meeting

Despite recent commentary that stubbornly high inflation might see the Reserve Bank of Australia resort to lifting the official cash rate,  the RBA board has held firm again today leaving the OCR unchanged at 4.35%.

It is the fourth meeting in a row that the board, led by governor Michele Bullock, has held the cash rate at 4.35%. Most economists and market experts were predicting no change in interest rates.

In its decision on Tuesday, the RBA board said recent information indicated that inflation continued to moderate, but was declining more slowly than expected.

“The CPI grew by 3.6% over the year to the March quarter, down from 4.1% over the year to December,” the board said in its monetary policy decision on the RBA website.

“Underlying inflation was higher than headline inflation and declined by less. This was due in large part to services inflation, which remains high and is moderating only gradually.”

The board said higher interest rates had been working to bring aggregate demand and supply somewhat closer towards balance.

“But the data indicate continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs. Conditions in the labour market have eased over the past year, but remain tighter than is consistent with sustained full employment and inflation at target.”

Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth, the RBA said.

“Meanwhile, inflation is still weighing on people’s real incomes and output growth has been subdued, reflecting weak household consumption growth.”

Services inflation a problem

The RBA board said the persistence of services inflation was a key uncertainty.  This was expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate.

Central forecasts are for inflation to return to the target range of 2% to 3% in the second half of 2025, and to the midpoint in 2026.

“In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year,” the RBA said.

Industry reaction to RBA decision

ING Australia head of consumer and market insights Matt Bowen (pictured above left), who appears regularly on the Seven Network’s Sunrise program talking about finance, said with inflation still running warmer than expected, many were probably not surprised the RBA kept their rates on hold today.

“In fact, in the lead up to the announcement only one out of the 24 economists polled by Bloomberg were expecting a rate rise, with most economists pushing back their forecasts for when the RBA will hike rates from September to November,”  Bowen said.

“While rates have remained on hold, home prices have been on an upward trajectory for some time now and there’s no indication that this will ease in the foreseeable future.

“For brokers, today’s RBA announcement may provide a good opportunity to check in with clients and offer a home loan health check to ensure they’re still getting the best deal for their individual circumstances.”

ANZ economist Madeline Dunk (pictured above centre)  said he RBA’s decision to keep the cash rate on hold was widely anticipated by the market and most economists.

“ANZ Research was expecting rates to stay on hold at 4.35% at today’s meeting,” Dunk said.

ANZ Research expected the RBA to keep the cash rate on hold until November, when it would start cutting rates.

“We expect a shallow easing cycle, with just three rate cuts,” said Dunk.

“The RBA will be looking to take interest rates towards the ‘neutral’ level – in other words, taking rates to a place where they are neither acting as a handbrake nor accelerator on the economy.

ANZ Research also expected the cash rate to stabilise at 3.6% by the middle of 2025.

Dunk said in light of the stronger than expected Q1 Consumer Price Index (CPI), there was a risk that the RBA did not start cutting rates until 2025.

“ANZ Research believes the RBA would want to see a material improvement in services and non-tradables inflation in the next quarterly inflation data before it can feel confident about cutting rates.

“This means mortgage holders are likely going to have to wait some time before they see rate cuts. We do, however, think government policy will help support mortgage holders in the meantime.”

Dunk said the federal government’s Stage 3 tax cuts, due to come into effect in July, would  boost household disposable incomes and put a lot of money back into the economy.

“ANZ Research has estimated the tax cuts will provide an economic boost equivalent to around two rate cuts.

“The Federal Budget is also likely to contain cost-of-living relief for households. For brokers, the housing market still looks relatively robust throughout most of the country, and ANZ Research expects housing prices to rise 5% to 6% this year.”

Mortgage Choice CEO Anthony Waldron (pictured above right) said the Reserve Bank’s decision followed the release of the March quarter CPI Index by the Australian Bureau of Statistics, which showed that while inflation came in higher than expected, it had been trending down since December 2022.  

“The decision to keep the cash rate on hold will be welcomed by borrowers who are hoping for cost-of-living relief when the Federal Budget is handed down on 14 May,” Waldron said.

“While the latest inflation data may have dashed borrowers hopes of a cash rate cut in the near future, I suspect the RBA will wait to see the Federal Budget and June quarter CPI before considering any changes to the cash rate.”

Mortgage Choice home loan submission data revealed that borrowers’ preference for variable rate home loans remained virtually unchanged since September last year. In April 2024, 97% of submissions were for a variable rate home loan. 

“Mortgage Choice submission data shows that cost-conscious borrowers are seeking better deals on their home loans, with a 2% increase in the proportion of borrowers opting to refinance in April 2024,” Waldron said.

“I’d encourage borrowers looking to save on their home loan repayments to meet with their mortgage broker to explore their options.

“There are lenders on our panel offering interest rates close to 6% p.a., and borrowers could save thousands in interest per year by making the switch. 

“With rates looking likely to stay on hold for the coming months, those in a position to buy their first or next home should consider meeting with their broker to understand their borrowing power.”

What type of conservations are you having with borrower clients about interest rates and inflation? Comment below