The Reserve Bank’s Decision: A Hold, But with a Twist
In a widely anticipated move, the Reserve Bank of Australia (RBA) has decided to keep the official cash rate at 4.35% following its latest board meeting. However, the RBA’s monetary policy statement contained a surprising twist – a more dovish tone, hinting that a rate cut might be on the horizon sooner than previously thought.
Economists Weigh In: A Rate Cut in February?
CBA chief economist Gareth Aird believes that the RBA’s comments reinforce his prediction of an early rate cut in 2025, likely at the RBA’s next meeting in February. He forecasts a 25-basis point interest rate cut, which would bring the cash rate to 3.35%. The money markets seem to agree, with a 69% chance of a rate cut in February.
Underlying Inflation Remains Too High
Despite the RBA’s hold, the board acknowledged that underlying inflation remains above its target range of 2-3%. Measures of underlying inflation are currently at 3.5%, still above the midpoint of the inflation target. However, the board’s tone suggests that they are becoming more open to the idea of a rate cut, sooner rather than later.
The Economy: A Mixed Bag
Australia’s economy grew at a sluggish 0.3% in the September quarter, thanks largely to government infrastructure projects and energy rebates. However, household spending remains weak, and business investment is subdued. The largest detractor from growth was electricity and gas spending, due to the implementation of energy bill relief rebates.
RBA’s Failure to Act Quickly in 2021: The Reason for Higher Rates Today
A new analysis by KPMG Inflation Pressure Gauge reveals that the RBA’s slow response to inflation in 2021 is the primary reason for higher interest rates today. The RBA’s failure to act quickly led to excess demand in the economy, which contributed to higher inflation. If the RBA had acted sooner, the economy might have experienced a quicker return to target inflation levels, and consumers and businesses might not be shouldering the financial burden they are today.
The Cost of Inaction: $6,000 a Year for Aussie Mortgage Holders
According to RateCity, Aussie mortgage holders who haven’t refinanced to a better rate are $6,000 worse off, even though the RBA has left interest rates unchanged for the past year. By refinancing to a rate under 6%, borrowers could save up to $10,000 in interest over the next two years. For those in Sydney and Melbourne, the savings could be closer to $20,000.
The Road Ahead: Will We See a Rate Cut in February?
While the RBA has dashed hopes of a pre-Christmas rate cut, there is a growing consensus that a rate cut might come sooner than expected. With a 69% chance of a rate cut in February, and a 100% probability of a rate cut by April, it seems that relief might be just around the corner for mortgage holders and the economy as a whole.