Cup Day hike to take 'heat out of the housing upswing'

The Reserve Bank of Australia (RBA) has announced its decision to lift the official cash rate by 0.25 per cent from 4.1 per cent to 4.35 per cent. This cash rate hike followed four consecutive holds beginning in July 2023 and now sits at its highest point since November 2011.

The November monetary policy meeting has marked the second board meeting for RBA governor Michele Bullock following the departure of Philip Lowe in September 2023.

Ms Bullock stated: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will 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 domestic demand, and the outlook for inflation and the labour market.”

Ms Bullock noted there are still “significant uncertainties” around economic outlook, particularly regarding persistent overseas services price inflation, the lags of the effect of monetary policy and the outlook for household consumption.

She said many households are “experiencing a painful squeeze” on finances “while some are benefiting from rising housing prices, substantial savings buffers and higher interest income”.

The central bank’s decision to resume its monetary policy tightening was almost unanimously expected by bank economists, however, the ASX’s RBA rate tracker indicated that the wider market was split down the middle, with 50 per cent calling no change in the cash rate and 50 per cent calling an increase of 0.25 per cent.

According to CoreLogic research director Tim Lawless, the decision to lift interest rates is “likely to disrupt confidence and take some further heat out of the housing market rebound”.

“The lift in rates combined with ongoing cost-of-living pressures and alarming geopolitical environment is likely to weigh on consumer sentiment, which is already in deeply pessimistic territory,” Mr Lawless said.

He added that lower confidence could “act as a drag on housing market activity”, dampening buyer demand during a time when “advertised stock levels are rising across most regions”.

“A rebalancing between buyer demand and advertised stock levels is likely to take some heat out of the housing upswing, which has already been losing some momentum, at least at a macro level, since the monthly rate of value growth peaked in May,” Mr Lawless said.

CreditorWatch chief economist Anneke Thompson said the RBA has taken the “controversial step” to raise interest rates once again while “some pockets of the economy are still seeing rampant price rises”.

“Unfortunately, the grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure, therefore this cash rate rise will have little impact on the prices of rents, fuel, insurance, and utilities,” Ms Thompson stated.

“Instead, this rise will be most burdensome for those businesses already at the coalface of the fight against inflation, such as the food and beverage, retail trade and construction sectors.

“Demand in these sectors has already contracted, and higher interest rates will force consumers and potential home builders/renovators to further rethink their future spending decisions.”

PropTrack senior economist Eleanor Creagh said the latest Consumer Price Index (CPI) data “indicated that inflation would likely move lower and return to the Reserve Bank’s 2–3 per cent target range slower than was previously forecast”.

“In order to keep inflation expectations anchored and maintain confidence in returning inflation to the target range within a reasonable time frame, the Reserve Bank lifted interest rates again today,” she said.

Westpac, the Commonwealth Bank of Australia (CBA) and ANZ agree for the time being that 4.35 per cent, while NAB has pencilled a final rate hike of 0.25 per cent to occur in the February 2024 meeting.

AMP head of investment strategy and chief economist Shane Oliver stated that the "near-term risk of another rate hike is high", particularly with high inflation and signs of "a pickup in wages growth".

"Our assessment is that the risk of another hike is around 40 per cent," Mr Oliver said.

"Key to watch ahead of the December Board meeting as to whether there will be another rate hike will be September quarter wages data on 15 November, October jobs data on 16 November and retail sales and monthly inflation data later this month."

Despite this, Mr Oliver said the group's assessment remains that the RBA has "already done more than enough to slow the economy in order to rebalance demand and supply and bring inflation back to target".

The RBA’s low tolerance rhetoric

The September quarter CPI increase of 1.2 per cent along with the RBA noting in the October monetary policy minutes that it has adopted a “low tolerance for a slower return of inflation to target than currently expected” shifted forecasts from major bank economists.

However, during the Senate economics legislation committee on 26 October, Ms Bullock expressed that the board was not sure that the CPI figures represented any “material change” and was not prepared to state whether or not it would change the RBA’s inflation forecast and monetary policy.

Prior to the release of the CPI data, the general consensus among economists was the peak of the cash rate hikes had been realised at 4.1 per cent.

Along with the updated cash rate predictions, the International Monetary Fund urged the RBA to recommence its monetary policy tightening in order to bring “sticky” and “high and persistent” inflation back towards the target range of 2–3 per cent.

“Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential,” the IMF stated.

[RELATED: Market split 50/50 on interest rate decision]