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RBA delivers interest rate reprieve for homeowners

The RBA has kept the cash rate on hold at 4.35 per cent but how long will it stay that way?

Reserve Bank (RBA) gave millions of mortgage holders a pre-Christmas present today, keeping interest rates on hold at 4.35 per cent.

With no RBA meeting in January, Aussies can now look forward to at least two months of rate relief and, in more good news for homeowners, three of the Big Four banks now believe the hiking cycle has hit its peak.

Borrowers have been under a significant amount of financial pressure, with the average Aussie with a $500,000 mortgage now paying roughly $1,210 more per month than they were before the RBA started hiking rates in May last year.

RBA governor Michele Bullock surrounding by houses. RBA interest rate decision.
Millions of mortgage holders can breathe a sigh of relief this Christmas, after the RBA kept interest rates on hold. (Source: Yahoo Finance Australia)

Are you being impacted by rising interest rates? Contact tamika.seeto@yahooinc.com

Commenting on the board’s decision, RBA governor Michele Bullock said data received on the domestic economy since November's meeting was broadly in line with expectations.

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"The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation," Bullock said.

"Overall, measures of inflation expectations remain consistent with the inflation target. Wages growth picked up in the September quarter but this was expected, given that it captured the earlier Fair Work Commission decision on award wages.

"Wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up. Conditions in the labour market also continued to ease gradually, although they remain tight."

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How long could rates stay on hold?

Bullock repeated her previous statement regarding potential future interest rate hikes, saying: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

CPI is expected to be around 3.5 per cent by the end of 2024 and back within the RBA’s 2-3 per cent target range by the end of 2025.

CBA, Westpac and ANZ’s economic teams are saying the current rate-hiking cycle has peaked, with NAB the only major bank forecasting another 0.25 per cent hike in February, to bring the cash rate to 4.60 per cent.

The major banks then think the RBA will keep interest rates on hold until either the third or fourth quarter of 2024, when it will begin cutting rates.

Australia data snapshot

  • Inflation eased to annual rate of 4.9 per cent in October, down from 5.6 per cent in September

  • Unemployment rate increased slightly to 3.7 per cent in October, up from 3.6 per cent

  • Retail sales fell 0.2 per cent in October ahead of the Black Friday sales, following a rise of 0.9 per cent in September

  • Home values are still increasing, but the heat is coming out of the housing market with November seeing the smallest monthly gain since February

  • Low fixed rates are coming to an end, with 880,000 fixed-rate loans ending over the course of 2023 and another 450,000 in 2024

  • Mortgage stress is at a high, with more than 1.57 million Aussies ‘at risk’ in the three months to September 2023 - or nearly a third of borrowers.

What could force another rate hike?

The December-quarter inflation data will be a “crucial” piece of the puzzle for the RBA board’s decision in February.

David Koch, economic director at Compare the Market, said the signs were promising with inflation inching closer to the RBA’s target range, but any future rate cuts would depend on whether this “goldilocks” zone could be met and sustained.

“The December-quarter CPI figure released on January 31 is going to be crucial in the future direction of interest rates,” Koch said.

“It’s not likely to get any worse, but higher rates may be here to stay for some time. While we can’t depend on the RBA to deliver rate cuts, borrowers need to be savvy if they want to save.

“If you haven’t refinanced for a few years, there’s a good chance you’re on a back-book rate that could be costing you hundreds of dollars more a month.”

Speaking ahead of the board meeting, AMP chief economist Shane Oliver said there was still a 40 per cent risk of another rate hike in February, depending on data.

“We think this would be overkill, but key to watch will be December-quarter inflation data … and the next two rounds of jobs and retail-sales data,” Oliver said.

If the RBA was to hike rates again by 0.25 per cent, RateCity data found a borrower with a $500,000 loan would be paying an extra $76 a month, or an extra $1,286 per month, since the rate hikes began.

Overdue loans are still low by historical standards, APRA data out today found, but are on the rise.

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