Mortgage holders and business owners are breathing a short sigh of relief after the Reserve Bank of Australia (RBA) decided to hold interests at their current level of 4.1%.
The decision to hold back on an interest rise is great news for all home-owners not on a fixed rate, with the RBA deciding not to raise interest rates for only the second time in 14 months.
The RBA also decided to keep the interest rate paid on Exchange Settlement balances at 4.00%.
RBA governor, Philip Lowe, said the bank’s board had elected not to move the cash rate for a 13th time since May 2022 as it had received improved inflationary data.
RBA holding its breath
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Mr Lowe said in a statement after the decision was released.
“In light of this and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook.”
According to data revealed to the RBA, Australia’s inflation has passed its peak and the monthly CPI indicator for May showed a further decline.
However, according to Mr Lowe, the RBA believes the nation’s inflation levels are still too high and will remain so for some time yet.
“High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.”
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. For these reasons, the board’s priority is to return inflation to target within a reasonable timeframe,” the RBA governor said.
Mr Lowe admitted that the Australian economy has slowed and conditions in the labour market have eased, however, the board expects the economy will grow as inflation returns to the 2 to 3% target range.
Record labour force numbers
On the job market, the RBA found that while firms have reported that labour shortages have lessened, job vacancies and advertisements are still at very high levels.
“Labour force participation is at a record high and the unemployment rate remains close to a 50-year low. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” Mr Lowe said.
“The board remains alert to the risk that expectations of ongoing high inflation will contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”
Potential for further interest rises
There was no clarity from the RBA on how long the halt in interest rate rises may last.
Mr Lowe said some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.
“The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the economic outlook and associated risks.”
“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the forecasts for inflation and the labour market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
That is not positive news for a homeowner with $500,000 owing on their loan who has seen their monthly repayments increase by around $1,134 a month since the interest rate hikes kicked in last May.
