Yahoo Finance Belinda Grant-Geary
Major interest rate cut warning as RBA's hold prompts recession alert
Struggling Aussies will have to contend with record-high interest rates for 2024 as the RBA continues its attack on inflation.
Yahoo Finance's live blog this Tuesday covered the Reserve Bank of Australia's interest rate decision. Governor Michele Bullock told borrowers not to count on a 2024 interest rate cut after keeping the cash rate at 12-year high of 4.35 per cent.
The move was widely predicted after the June quarter inflation figures were largely in line with forecasts.
Treasurer Jim Chalmers has chalked the call up as a win for Aussies suffering with cost-of-living pressures as he said impacts of a "volatile" stock market were being monitored.
Some have called for another increase, but others argue that even keeping the rates on hold is causing "unnecessary pain" to borrowers and businesses.
Commonwealth Bank and Westpac are still forecasting an interest rate cut this year, while ANZ and NAB predict borrowers won't get relief until 2025.
However, a cut can also have implications.
Mortgage broker Maddie Walton said there's been a surge in Australians seeking pre-approval as once rates drop, borrowing power will increase and it's likely so will property prices. Read more below.
LIVE COVERAGE IS OVER19 updates
Australia vs the world: When will interest rates come down?
Bullock acknowledged that other nations have started cutting rates, but said we are in different economic situations.
"The point about a floating exchange rates is you do have a little bit of flexibility,” she said.
"You, you still have to consider what's going on in other economies. But you can focus a little bit on your domestic economy.
"I would resist peer pressure."
I will reuse this picture from earlier than shows who has already launched into cuts, and where their inflation currently sits.
Inflation and interest rates around the world. (RateCity) She said New Zealand and the US Federal Reserve were expected to start cutting rates in coming weeks, but noted that Australia's interest rates did not go as far as her American counterparts.
“That’s been used against us,” Bullock said.
“Some commentators are very certain that we haven’t gone high enough, and we need to go more.
“We’re maybe not quite as restrictive as some other countries, but we’ve chosen that because we’ve deliberately tried to follow this narrow path of bringing inflation back down at the same time as we preserve what we can in the labour market.”
'Difficult': Distressed borrowers write to RBA boss
RBA Michele Bullock The RBA boss has received messages from distressed Aussie homeowners who have detailed the struggles they’ve faced as a result of the RBA’s interest rate decisions.
Her predecessor, Philip Lowe, used to read emails and letters from the public about how a decision to cut, hold or hike rates would impact them and it’s a tradition that’s been passed on to the current RBA governor.
But Bullock admitted that after more than a dozen interest rate rises since 2022, the letters she gets are overwhelmingly negative.
“It does affect me personally,” she said at the press conference.
“I do find it difficult to read some of them, and I can't respond to every single letter I receive. Some I do try to respond to, but it's difficult, you know, to read about it.”
She added that while the RBA’s decision today to keep rates on hold at 4.35 per cent might not be the news that many had hoped for, she believes it’s necessary for the greater good.
“It's not just interest rates hurting those people, it's the cost of living,” she said.
“It's the fact that inflation has been so high now for a few years… and they don't want to see the prices of their essentials going up at the rate they are.
“So the most important thing that we, I and the board, can do is to get that inflation rate back down.
“Getting inflation down is really the key to this ultimately being resolved, so that households can just get on with their lives.”
Cold water poured on 2024 interest rate cut hopes
RBA governor Michele Bullock Near-term feels about as vague as it gets and Bullock has been asked to break down how borrowers can interpret that, considering a rate cut has been priced in for 2024 by the market and many economists, including from the Commonwealth Bank and Westpac.
But the RBA governor reiterated it’s not looking good for 2024.
“The board's feeling is that the near term in the next, by the end of the year, in the next six months, that doesn't align given what the board knows at the moment and given what the forecasts are," Bullock said.
"That doesn't align with their thinking about interest rate reductions at the moment."
She said the board did consider a rate hike during the August meeting.
“I suppose it was a very serious consideration,” she said.
“There were only two things on the table, hold, accepting that we might have to hold for some time, or raise.
And I think the board felt that the risks associated with raising at this point, as opposed to holding, where we are and just staying where we are, warranted the second alternative, which is what we did.”
Bleak interest rate warning from RBA boss
Michele Bullock said there will not be an interest rate cut in the "near term". (AAP) Michele Bullock has delivered the news stressed mortgage holders don't want to hear.
"A rate cut is not on the agenda in the near term," she said.
"We've seen from overseas experience how bumpy inflation can be on the way down and across the economy.
"We need to see demand and supply coming back into better balance.
"Now, I understand that this is not what people want to hear. I know there are many households and small businesses that are struggling with interest rates where they are.
"Many people are doing it tough and we're very conscious of that.
"The board is very conscious of that. But really the best thing we can do... is to bring inflation back down to target, because we can't let inflation get away.
"It hurts everyone. It particularly hurts people on lower incomes."
Treasurer backs cost-of-living support
Jumping across to Treasurer Jim Chalmers.
He's welcomed the decision from the RBA as it "recognises the pressure that people are under".
"Australians are doing it tough enough already," he said at a press conference on Tuesday.
"The last thing they needed today was more cost-of-living pressure."
As I mentioned before the decision, there are concerns cost-of-living measures like energy rebates and rent assistance could drive further inflation.
But Chalmers has argued the downward trend on trimmed mean inflation proves this isn't the case.
Jim Chalmers has welcomed the RBA's decision to hold interest rates. (Tracey Nearmy via Getty Images) "We said around budget time, before that and since then, just how important it is that we recognise the balance of risks in our economy, domestic and international, growth and inflation," he said.
"And it's just as important now as it's ever been that we continue to deliver that responsible economic management, which is all about fighting inflation and providing cost-of-living relief at the same time as we get the budget in better nick without smashing the economy."
ASX DROP: Chalmers said market volatility that's played out in Australia was driven by "weaker-than-expected jobs growth and tech earnings in the US, as well as rising Japanese interest rates impacting Asian markets"
"Australia's not immune from these global developments. We've seen them play out in the Australian dollar and in our own share markets as well. I've been briefed by Treasury today on this volatility, and I'll be kept up to date on developments as they unfold."
Interest rates kept on hold
The Reserve Bank of Australia has held the cash rate at 4.35 per cent. The Reserve Bank of Australia (RBA) has kept the cash rate on hold at a 12-year high of 4.35 per cent.
Experts are warning the central bank risks inflicting “further, unnecessary pain” on Aussies and small businesses if it keeps interest rates too high for too long.
CreditorWatch chief economist Anneke Thompson said its data had pointed to a “significant cooling” in business activity, with the average value of invoices held by businesses dropping 49.9 per cent over the year to June.
“Holding the cash rate at this peak for too long risks causing further, unnecessary pain on many small businesses, particularly in the construction, retail and hospitality sectors,” Thompson said.
AMP chief economist Shane Oliver believes mortgage holders are bearing too much of the brunt from the RBA’s attempts to curb inflation.
“Tighter fiscal policy in the form of tax hikes and spending cuts or maybe a 1 per cent super levy on everyone would better spread the burden,” Oliver said.
“But that would mean politicians would have to do things that are politically unpopular and history shows that they cannot be relied upon to do that.”
You can read more about the decision, and the RBA's statement here.
Wait for a cut or buy now?
It's under an hour until the interest rate call will be handed down.
But in the lead-up, Yahoo Finance has touched base with some experts about what a hold might mean.
A hold may not seem appealing as a cut, but given chatter of another hike was rife just last month, some say borrowers should count themselves lucky.
"The market is now pricing in a 5 per cent chance of a decrease today. In other words, the rate will likely remain on hold, with a glimmer of hope for a cut this year, significantly boosting morale for mortgage owners currently under stress," Rethink Investing managing director Scott O'Neill told Yahoo Finance.
Property prices have been steadily increasing around the country and O'Neill - who amassed a $20 million property portfolio with his partner - said this trend would continue.
"With stock levels remaining low in both the commercial and residential property markets, prices are expected to continue rising, similar to the trend observed during the previous 13 rate increases," he said.
So, does that mean this is a good time to buy? Or should you wait for interest rates to drop?
"It would be a significantly better move to purchase before a rate drop," O'Neill said.
"Acting before a positive economic event positions you ahead of those who move later, allowing you to benefit more from the growth cycle.
"Once the interest rate drops, there will be an influx of investors entering the market, increasing demand.
"Additionally, as rates decrease, property owners tend to raise their asking prices, creating upward pressure on property values. Therefore, acting sooner rather than later is advisable to maximise your benefits."
Scott O'Neill said it's better to buy before an interest rate cut. (Supplied) Harrowing house deposit rise
Interest rates are hurting mortgage holders, but some can't even get a foot on the property ladder as the price of a deposit continues to rise. (AAP/Getty) The average borrower has seen their mortgage repayments jump by about $1,500 a month in the RBA’s aggressive rate hiking cycle.
It’s a hefty whack to the finances, but what about those still scrimping and saving a deposit to buy a property?
New data from Domain has shown that in the last five years, borrowers in Sydney are expected to save an extra $125,424 to get a mortgage on the median home.
The target of $207,066 needed in June 2019 is now $332,000.
In Brisbane, that’s up $81,498 from $133,795 to $195,293.
Further south, in Melbourne, the average deposit is $213,761. A jump of $48,549 from the $165,212 needed five years ago.
Perth is one of Australia’s hottest real estate markets. The moving target for a house deposit has increased $64,313 from $106,000 to $170,000.
None of these figures include stamp duty or transaction costs.
This comes as the average owner-occupier’s mortgage hit a record high of $636,597.
“Over the last 12 months, the national average has risen by $56,357, an increase of $154 a day, despite the fact the cash rate is at its highest level since November 2011,” RateCity said.
AMP senior economist Diana Mousina said the “challenging” market meant a dual-income couple would need to be saving for about 10 years for a deposit.
That’s up from the average three to four years it took between 30 and 40 years ago.
Where are interest rates dropping?
An interest rate cut from the RBA today would surprise most economists, but there are countries around the world already giving borrowers a break.
Canada made two cuts in June and July, while the European Central Bank dished one out in June.
Just last week the Bank of England made a cut.
The US Federal Reserve stopped short of dropping interest rates, but signalled a downward move was on the cards as soon as September.
RateCity did some number crunching so you can see where Australia sits in terms of inflation and interest rates.
Inflation and interest rates around the world. (RateCity) “While these jurisdictions are further advanced in their battle with inflation, it’s also important to note Australia is unique in terms of the number of mortgages on variable rates and the amount of debt mortgagors have,” RateCity said.
Will the volatile share market here and overseas impact the RBA's decision?
What does the ASX stock market bloodbath mean for the Reserve Bank of Australia? (Getty) There has been a recent bloodbath for global and domestic markets, with $102 billion wiped off the S&P/ASX 200 index.
Monday was the worst one-day wipe-out since May 2020 and it has sparked fears that we're on the brink of a global recession.
This has left some wondering whether the RBA will take this into account at its August and September meetings and potentially drop the official cash rate to spare Aussies from further pain.
However, experts have played down any hope of mortgage relief as a knee-jerk reaction to the share market.
"It's probably unlikely that they would do that because it probably would send out the wrong signal and would probably concern markets," CommSec economist Steve Daglian told the Daily Mail.
"I don't think the Reserve Bank is going to make any rash decisions today and surprise markets in a significant way."
AMP Capital economist Shane Oliver said the RBA very rarely works on such short-term issues.
"It's a bit too early to do anything in response to it, but obviously they're keeping an eye on it that things get a lot worse. So, I don't see them adjusting rates this quickly."
