The Reserve Bank of Australia (RBA) has decided to cut interest rates for the second consecutive time, keeping the official cash rate unchanged at 4.1%. This marks the third pause in rate adjustments since May 2022, providing “much-needed breathing room,” according to a leading economist.
Ray White Group’s Chief Economist, Nerida Conisbee, welcomed the decision and suggested that it might signal the end of rate hikes. She mentioned that many people are struggling with living costs, especially those with mortgage loans, as the rapid rate increases have put pressure on them. This move is also seen as positive for the entire property market, as there are supply issues in housing, and higher rates have not encouraged more construction projects. Conisbee expressed hope that this would be the final rate adjustment, considering the return of inflation, which grew by 0.8% in the June quarter, nearing the lowest level in two years.
Some economists, however, predict there might be one more rate hike before the rate cycle peaks. In a statement on Tuesday, Reserve Bank of Australia Governor Philip Lowe stated that the board decided to keep rates stable this month to allow more time for evaluating the impact of rate increases on the economy and economic prospects. However, he acknowledged that inflation remains elevated. To ensure inflation returns to the target level in a reasonable time, further monetary policy tightening may be necessary, depending on data and ongoing risk assessments.
Lowe emphasized that the board will closely monitor global economic developments, household spending trends, as well as inflation and labor market prospects when making decisions. The board is committed to restoring inflation to the target range and will take necessary measures to achieve this goal.
Although the Consumer Price Index (CPI) rose by only 0.8% this quarter, the lowest increase since September 2021, the annual inflation rate remains at 6%, exceeding the Reserve Bank of Australia’s target range. The quarterly inflation is primarily driven by rising prices in the services category, influenced by rental costs, travel, and entertainment expenses. Michelle Marquardt, the Director of Price Statistics at the Australian Bureau of Statistics, highlighted that services inflation has surpassed goods inflation for the first time since September 2021, indicating a shift from the price-driving factors seen 12 months ago, when new homes and automotive fuel contributed to inflation. Presently, the increase in prices for services such as rent, dining, childcare, and insurance has sustained the higher inflation levels.
Since the beginning of last year when interest rates started to rise, Australians have seen a record level of mortgage refinancing. Kareene Koh, CEO of Domain Home Loans, stated that the consecutive second rate hold this month will inject ample consumer confidence into the market. The rapid rate increase has indeed put pressure on those with mortgage loans, causing a ripple effect on the economy. This not only affects buyers and sellers and their transactions in the market but also impacts tenants, as they typically pass on the additional mortgage costs through higher rents. Stable rates will reduce uncertainty in the real estate market, providing some clarity for homeowners and tenants while giving buyers and sellers the confidence to make informed decisions.
The latest data from Domain’s property price report shows that Australia’s property market recovery has made good progress, which also contributes to increased market confidence. Dr. Nicola Powell, Domain’s Chief Economist, expressed her opinion that the national median house price increased four times faster in the June quarter compared to the first three months of the year. House prices are recovering from their lows and are likely to continue growing steadily. Previously, some people were concerned that falling house prices would damage their loan-to-value ratios, but we have not seen that happening now. The recent rebound in house prices has shown signs of stabilization as new listings for sale have increased. Sellers attracted by the price recovery are returning to the market, leading to a growth in new housing supply in major cities. This may indicate potential stability in house prices as more supply enters the market.
The latest data from the Australian Bureau of Statistics on new home loans shows some growth in mortgage activity for investors and owner-occupiers, reflecting slowly increasing market confidence. There is now a view that interest rates have either peaked or are very close to peaking, which boosts confidence in the real estate market. Additionally, aspects such as declining construction costs and the beginning of the tourism industry’s recovery are being observed. The future outlook has many positive factors.
The expectation for a rate cut is more apparent for the Australian property market and the overall economy. Stable rates and signs of housing price recovery are instilling confidence in both buyers and sellers, while tenants can benefit from reduced rental pressure. This move is expected to stabilize the real estate market, stimulate more construction projects, and support the ongoing economic recovery. However, economists also caution that inflation remains an issue that requires close monitoring, and future adjustments may still be made based on data and risk assessments. Overall, the market is optimistic about the decision to keep rates stable, but remains vigilant about future economic trends and changes in monetary policy.
