Lowe's last gift to borrowers; Cash rate holds steady

The Reserve Bank of Australia (RBA) has decided to hold the official cash rate steady at 4.1 per cent for the third consecutive month since rates started rising in May 2022.

RBA governor Philip Lowe said following the decision: "Interest rates have been increased by 4 percentage points since May last year. 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. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook."

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed.”

Mr Lowe continued that there are significant uncertainties around the outlook, such as services prices inflation, lags in the effect of monetary policy, and how firms’ pricing decisions and wages respond to slower economic growth in a tight labour market.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of 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 outlook for inflation and the labour market," Mr Lowe concluded.

PropTrack senior economist Eleanor Creagh said the subsiding momentum in inflation and consumer spending have “eased pressure on the RBA” to continue lifting interest rates as the central bank “tries to avoid a recession while returning inflation to the target range”.

“The high level of inflation, which has challenged the Australian economy and seen interest rates rise at the fastest pace in a generation, continued to moderate faster than expected in August, the third straight monthly slowdown,” Ms Creagh said.

“Furthermore, the full impact of the tightening already delivered is yet to be felt and we’re likely to continue to see inflation moving lower as a result. Together, this gave the RBA leeway for a pause in September.”

CreditorWatch chief economist Anneke Thompson said the RBA’s decision to hold came in light of recent data indicating weakening economic conditions.

“After months of leading indicators pointing to a slower jobs market, the unemployment rate increased from 3.5 per cent to 3.7 per cent in July 2023,” Ms Thompson said.

“Coupled with a fairly moderate increase in the Wage Price Index (WPI) of 3.6 per cent over the year to June, as well as declining job ads, the RBA can now be reasonably confident that the threat of the dreaded price-wage spiral has diminished considerably.”

NAB home ownership executive Andy Kerr said this month's hold gives homeowners "some much-needed stability over their repayments" and clarity over how to manage household budgets in the face of rising cost of living.

"Customers with fixed rate home loans due to finish up soon also have greater sense of certainty as they roll off onto more solid ground.

"Today’s decision is welcome news for around a third of Australians with a mortgage but we know rising living costs are still a cause of concern for many more and there’ll be some people who are worried about their financial situation," Mr Kerr added.

CoreLogic research director Tim Lawless noted inflationary trends, particularly in the services sector, remained elevated, however, the trend is "heading in the right direction" with the RBA confident inflation will return to target in late 2025.

PEXA chief economist Julie Toth said this hold will be welcome news for current a prospective mortgage holders, who are still in the process of adjusting to prior hikes.

“Australia’s housing markets stabilised in early 2023 and have been recovering since around March, with a gentle lift in prices and sales volumes across most locations.

"Today’s extended pause in monetary policy tightening will help foster greater confidence in the housing outlook, particularly among most buyers who rely on mortgages to finance their homes,” Ms Toth said.

Commonwealth Bank of Australia (CBA) senior economist Belinda Allen commented on the decision: "The narrow path the RBA has been hoping to achieve –one where inflation comes back down gradually to target and some of the gains in the labour market are retained, seems to be more probable than initially expected."

ANZ head of economics Adam Boyton said the major bank saw nothing in the post-decision statement that would push them off the stance that the RBA is on an extended pause as it monitors the effect of the 400 bp of monetary tightening has on the economy.

Westpac chief economist Bill Evans noted a few "significant changes" in the statement relative to the August meeting, with the shifts being "broadly consistent with the encouraging data developments listed above".

What was expected and what's next?

A hold in the cash rate was unanimously expected by the major banks on the back of “encouraging” economic data, particularly the lower-than-expected monthly Consumer Price Index (CPI) data returning a rise of 4.9 per cent in the 12 months to July 2023, down from the 5.4 per cent recorded the month previous.

Three out of four of the major banks’ economists predicted that the RBA has reached the end of its monetary policy tightening, with the next moves in the cash rate expected to be cuts during 2024.

NAB remains as an outlier in this regard. The major bank expects a further cash rate hike of 0.25 bps in December to bring the official cash rate to a peak of 4.35 per cent.

The September monetary policy meeting also marked the final meeting to have Mr Lowe sitting as RBA governor, as his seven-year tenure comes to an end next week.

Mr Lowe’s successor Michele Bullock will take up the governor position at the central bank on 18 September 2023.

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