RBA holds rates again – but for how long?

<p>For the fourth consecutive month, the Reserve
Bank of Australia has kept the official cash rate at 4.1%, however it has not
ruled out raising rates in the future if necessary to bring stubborn inflation
back down to target.</p><p>So far its the fifth time that the RBA has put
rates on hold during its current rate-hiking cycle since May of last year, when
the bank started raising rates to combat out of control inflation. The cash
rate is now at its highest level since April 2012, and many mortgage holders
and borrowers are stretching their resources thin to keep up with both
inflation and rising rates.</p><p>Although inflation increased to 5.2% in August
from 4.9% in July, the RBA's decision to keep rates steady was in line with
what financial markets and analysts had predicted. Fuel price increases, which
have a knock-on effect on transportation expenses, together with increases in
the costs of housing, food, and insurance, led to the first monthly rise in
inflation since April. However, underlying inflation continued to fall which
was probably part of why the RBA felt comfortable holding this month.</p><p>We’ll take a look at the ins and out of this
latest Monetary Policy Meeting below and how the Aussie economy is fairing as a
result.</p><p>RBA debut’s its new Governor</p><p>The board meeting this week was the first
under new Governor Michele Bullock, who succeeded Philip Lowe last month after
his term ended. Investors were eager to see if her leadership would alter the
direction of policy, but in her first
public remarks she echoed Mr. Lowe's previous comments that further rate hikes
may be necessary in the future to battle inflation. </p><p>Bullock said that the RBA anticipates
inflation to revert to its target range of 2-2.5% towards the end of 2025, but
she also concedes that increasing fuel costs and rents will likely be
problematic for that goal to be achievable.</p><p>"Timely indicators on inflation suggest
that goods price inflation has eased further, but the prices of many services
are continuing to rise briskly and fuel prices have risen noticeably of late.
Rent inflation also remains elevated," she said. "Inflation is coming
down, the labor market remains strong and the economy is operating at a high
level of capacity utilization, although growth has slowed."</p><p>RBA remains cautious</p><p>The board’s statement today highlighted some
significant uncertainty surrounding the central bank forecast and encouraged
the use of caution as it continues to navigate a narrow path to an economic
‘soft landing.’</p><p>The board suggested that Inflation in the cost
of services has been remarkably constant in other countries, and this trend may
eventually reach Australia. Also, even if the labor market is tight, there are
questions about how long it will take for monetary policy to take effect and
how companies will adjust their pricing and pay structures in response to
slower economic growth. </p><p>In the case of the property market, it's true
that some families are benefitting from growing property values, sizable
savings buffers, and greater interest income, while others are feeling a harsh
strain on their finances, leaving them unsure about household consumption. </p><p><a href="https://www.abc.net.au/news/2023-10-03/reserve-bank-interest-rates-on-hold-financial-stress-mortgages/102925308">According</a> to an analysis by RateCity.com.au of
data from the Reserve Bank and other major banks, 730,000 mortgages have
recently transitioned off their ultra-low fixed rates in 2023 to the much
higher variable rate, with another 150,000 expected to follow for the rest of
the year.</p><p>According to RBA data, 590,000 mortgages came
off fixed rates in 2022, followed by 880,000 expected in 2023 and another
450,000 in 2024.</p><p>Furthermore, worldwide anxiety surrounding the
future of the Chinese economy is still a concern as a result of continuous
pressures in the housing market there.</p><p>Aussies cutting back or going
without</p><p>According to recent research of 7 million
Commonwealth Bank customers' spending patterns for <a href="https://www.afr.com/politics/boomers-splurge-on-holidays-and-cruises-amid-interest-rate-windfall-20230616-p5dh3k">Australian Financial Review Weekend</a>, senior
Australians have increased their total spending across all discretionary
categories over the last 12 months consistently more than younger age groups.</p><p>Its attributed to the higher interest rates
generally have increased the disposable income of Australians over 65, enabling
them to indulge on plane tickets, vacations, and cruises while younger age
groups have apparently been cutting down.</p><p>RBA officials also recently <a href="https://www.news.com.au/finance/money/costs/secret-rba-documents-reveal-even-highincome-middleclass-aussies-are-in-financial-crisis/news-story/4562872205939edc00e10400e8c2fc84">addressed data</a> revealing the long lag between
people first experiencing financial stress, and showing up in official data on loan
arrears in papers <a href="https://www.rba.gov.au/information/foi/disclosure-log/">released</a> under the Freedom of Information Act.</p><p>According to an internal RBA email from July
following a meeting with helpline staff, statistics revealed a large upsurge in
demand for the national debt hotline, particularly from users who had never
previously used the service before and had seemingly stable incomes.</p><p>A large percentage of people who called the
national debt hotline described being in financial difficulty and collecting
more debt via the use of credit cards, buy now pay later, loans from friends
and family, and increasingly unmet commitments to the Australian Tax Office,
their utility suppliers, and council rates. In order to make up for financial
shortages, people were also reported to be skipping insurance payments,
underinsuring themselves, or researching ways to access their superannuation
early.</p><p>Rates Forecast</p><p>17 out of 30 economists polled by <a href="https://www.reuters.com/markets/rba-hold-rates-410-oct-deliver-one-final-hike-by-end-2023-2023-09-29/#:~:text=A%20slim%20majority%20of%20economists,done%20with%20its%20tightening%20cycle.">Reuters</a> predicted that the RBA would raise the
official cash rate to at least 4.35% by the end of this year. The remaining 13
polled predicted no change to rates.</p><p>ANZ, CBA, and Westpac, three significant
Australian institutions, have suggested that the RBA has completed its tightening
cycle. Only NAB anticipated an additional 25 basis point increase to come in
November.</p><p>More data critical to the decision making
process are to be released later this month, including Employment figures on
the 20th October, new quarterly inflation figures on the 25th October and
monthly inflation figures are also expected on the 31st of October.</p><p>The information provided does not constitute
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This article was written by FM Contributors at www.financemagnates.com.