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RBA keeps interest rates on hold at 4.35 per cent

The Reserve Bank of Australia (RBA) has kicked off 2024 with an interest rate hold, electing to keep the cash rate at 4.35 per cent at its first meeting of the year.

But Governor Michele Bullock has refused to rule out another interest rate rise, emphasising that inflation is still high and that it must fall and remain “sustainably” in the 2-3 per cent target range.

The decision comes on the back of the latest inflation figures showing CPI had dropped to 4.1 per cent for the December 2023 quarter, down from 5.4 per cent in September and well below the 7.8 per cent recorded 12 months ago.

Ms Bullock agreed the lower inflation figures were promising but said we were not out of the woods just yet.

“While recent data indicate that inflation is easing, it remains high,” she said. 

“The Board expects that it will be some time yet before inflation is sustainably in the target range. 

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out. 

“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. 

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Ms Bullock said the forecast was for inflation to reach the target range in 2025, and the midpoint in 2026. 

She said goods price inflation was lower than the RBA’s November forecasts, while services price inflation had dropped at a more gradual rate and remained high. 

“This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs,” Ms Bullock said.

“Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases. 

“Employment is expected to continue to grow moderately and the unemployment rate and the broader underutilisation rate are expected to increase a bit further.”

Ms Bullock said conditions in the labour market continued to ease, but they remained tighter than what is consistent with sustained full employment and inflation at target. 

“Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target, on the assumption that productivity growth increases to around its long-run average,” she said. 

“Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.”

Geoff Lucas – The Agency

The Agency Managing Director and Chief Executive Officer Geoff Lucas said the RBA’s decision was expected following last week’s inflation data but warned that rate cuts may not eventuate as early as some commentary has suggested. 

“It’s important to note that last week’s inflation numbers were assisted by government subsidies for rent and electricity for low income earners and despite the encouraging trajectory, inflationary pressures, especially services inflation, do remain,” he said. 

“Today’s interest rate decision will continue to support positive buyer demand in the short term, but we must recognise the economic reality that interest rates are likely to continue at this level for some time and anticipated interest rate cuts may not happen as soon as current speculation.”

Mr Lucas said today’s RBA announcement was the first in the new regime of six-weekly intervals between meetings and the reduced frequency, coupled with expected reduced volatility in rate changes this year, is likely to reduce the hyper focus on interest rates of the past two years. 

“Increasingly, this year will be focussed more on demand and supply as the key drivers of residential price movements,” Mr Lucas said.

“We expect 2024 will see more buyer and seller confidence due to reduced rate volatility, and greater clarity on a lower range of residential price movements.”

Stewart Bunn – First National Real Estate

First National Real Estate Chief Communications Officer Stewart Bunn said the network’s agents welcomed the RBA’s decision and it would add confidence to the property market.

“Last week, nationally, we saw the second largest number of homes go under the hammer since records started in 2008,” he said. 

“That delivered an auction clearance rate of 73.9 per cent. 

“This potentially highlights three things, including that homeowners are confident that market conditions will deliver them an attractive return on their investment. 

“That there are still a number of people concerned about mortgage repayments and that this is an opportune time to sell. 

“And, three, that buyers have confidence that they can invest with an appropriate degree of certainty about where interest rates will head next.”

Nerida Conisbee – Ray White Group

Ray White Group Chief Economist Nerida Conisbee said the interest rate outlook had changed dramatically at the end of 2023. 

“In early December there was a view that we were in for at least one more rate rise,”

“In mid December however, a sharp drop in US inflation, followed by the suggestion by the US Federal Reserve that rates could be cut three times in 2024 led to a change in sentiment in Australia. 

“By the end of December, markets were pricing in two rate cuts for Australia in 2024.

‘A further driver of downward pressure on rates is December inflation which came in at four per cent for the year, a significant decline from the September quarter result of 5.4 per cent. 

“The quarterly decline was the lowest it has been since March 2021.”

Ms Conisbee said the big difference between Australia and the US was the state of the rental market, with Australian rental rises settling down a bit even though there was still a short supply of homes.

“High construction costs are preventing more properties being built and high interest rates is leading to relatively lacklustre investor activity,” she said.

“These rental increases are feeding into Australian inflation, further contributing to the lack of rental properties. 

“In the US, construction activity is strong and there is a surplus of rental properties.

“More positively for Australian rental increases is that there have been some major changes to rent assistance and in the December quarter inflation numbers, rental increases were significantly reduced compared to where they would otherwise have been.”

Ms Conisbee said mortgage holders would welcome today’s interest rate hold but said it didn’t provide much relief. 

“A decline in rates, the first of which is expected sometime in the first half of the year, can’t come soon enough,” she said.

Mathew Tiller – LJ Hooker

LJ Hooker Head of Research Mathew Tiller said today’s cash rate hold would see more listings come to market and strong buyer demand.

He said, households were holding back on non-discretionary spending, with inflation data from the Australia Bureau of Statistics strongly indicating that the RBA is unlikely to implement any further rate increases.

“The latest CPI figures show that inflation is falling faster than the RBA’s forecasts – this combined with softening retail spending, particularly over the Christmas period, should signal the end of the RBA’s rate-hiking cycle,” he said. 

Mr Tiller said speculation as to when the RBA may cut interest rates was likely to result in more people jumping back into the market. 

While there are some suggestions this could happen as early as May, he believes it is more likely to occur in August. 

“The talk is now about when they are going to cut interest rates and as this circulates buyers will think rates have peaked and will start looking for the bottom of the market which could bring further activity,” Mr Tiller said.

It has been a strong start to the 2024 property market with stock levels up in comparison to this time last year. 

According to CoreLogic, listings have increased in Sydney, Brisbane and Melbourne while remaining tight in Adelaide, Hobart, Darwin, Perth and Canberra.

Even with more homes being listed for sale, Sydney and Melbourne last week achieved preliminary clearance rates of 76 per cent and 70 per cent respectively.

“It is a supply and demand situation – we have had strong population growth and that demand base keeps growing at a time when dwelling approvals and constructions are at very low levels,” Mr Tiller said.

“Vacancy rates are tight as well. So, until some supply starts to kick in, along with easing construction costs and labour shortages, the demand pressures will still be there.”

Anne Flaherty – PropTrack

PropTrack Economist Anne Flaherty said today’s RBA decision would boost sentiment in the property market.

“Today’s decision is good news for the housing market which looks set to benefit from a more stable interest rate environment in 2024,” she said.

“Greater confidence around where interest rates are sitting should support further recovery in buyer and seller confidence.”

Ms Flaherty said today’s decision was widely expected in light of last week’s release of the latest consumer price index figures which showed inflation slowed over the December quarter.

“Headline inflation came in at 0.6 per cent over the December quarter, the lowest growth in consumer prices since March 2021 and below the RBA’s forecasts,” she said.

“This continues the trend of declining annual growth in consumer prices and increases the probability that interest rates have hit their peak in the current cycle.”

Ms Flaherty said while rates appeared to have peaked, two years of high inflation had eroded real wages and, as of September, the household saving to income ratio was sitting at just 1.1 per cent. 

“This is the lowest level seen since December 2007 at the onset of the Global Financial Crisis,” she said.

“Despite this, house prices have displayed remarkable resilience, with buyer demand remaining strong relative to the supply of homes coming to market.”

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