With the former Reserve Bank governor Philip Lowe ending his seven-year term on the 17 September, and with the appointment of Michele Bullock to the position, it was generally anticipated that the first meeting held today under the auspices of the new RBA governor would be one pencilled in for a soft landing.
And a soft landing it was, with the RBA Board opting to keep the official cash rate at 4.10% for the fourth month in a row for Michele Bullock’s first cash rate decision, despite a slight worry with the latest inflation numbers last week. And eight consecutive months of house price rises.
Add to that a steeply declining Australian dollar currently at 0.63 cents but expected to be squeezed in the 0.55 to 0.58 cent range due to our lagging interest rate levels as compared to a strong US dollar with the base interest rate in the US at 5.50% and driving a strong economy.
And in addition, a local economy where many believe the actual inflation rate quoted at 5.50% is much higher with commodities such as milk rising by 15% alone and fuel prices at an all-time high with no sign of abating.
But blooding a new RBA governor has to get some consideration, and the bookies would have lost a packet on this one with every expert panellist on the Finder RBA Cash Rate survey (38/38) tipping the RBA would hold the cash rate at 4.10% and that consensus of minds was the first time that’s happened this year.
Holding onto every breath the new RBA governor muttered, when Michele Bullock said the higher interest rates are already working to establish a more sustainable balance between supply and demand in the economy and will continue to do so, there was a unanimous sight of relief.
RBA governor Michele Bullock explained, “Interest rates have been increased by 4 percentage points since May 2022. 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,” Michele Bullock concluded
With the RBA decision passed down it reverberates into a two paced economy where many of the expected 780,000 new immigrants believe working as a courier to deliver parcels purchased Online will gain enough income to pay back a record purchase price paid for their new house, while 44% of those already in the mortgage belt are at break-even point on income to expenditure each month.
Add to that pain many current homeowners rolling off fixed rates as low as 1.99% to be greeted with a new rate of 5.75% plus from their lender and this is all part of the dilemma the RBA board faces when it is scheduled to meet again on Tuesday 7 November 2023.
And while no-one in the industry expected a rate rise this time around, the next meeting will be a far different story. By then the new RBA governor has had the time to settle in, and it’s at a period of time between school and Christmas holidays where a rate rise decision increase will have the desired impact for credit seekers to cut back on their expenditure.
Apart from the well-placed timing of the call, the RBA will further be forced to act on another 0.25% hike at their next meeting due to the many lenders already creeping the rate up unofficially by 0.15% over the past month alone.
And while the expert panellists on the Finder RBA Cash Rate survey tipped the RBA would hold the cash rate at 4.10% in September with a (38/38) consensus, expect to see a markedly split vote when it comes to considering the chance of a base cash rate at 4.35% following the November RBA board meeting.
Statement from the RBA governor Michele Bullock
Date 3 October 2023
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.10 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.00 per cent.
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.
Inflation in Australia has passed its peak but is still too high and will remain so for some time yet. Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly, and fuel prices have risen noticeably of late. Rent inflation also remains elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2 to 3 per cent target range in late 2025.
Growth in the Australian economy was a little stronger than expected over the first half of the year. But the economy is still experiencing a period of below-trend growth, and this is expected to continue for a while. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Notwithstanding this, conditions in the labour market remain tight, although they have eased a little. Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4½ per cent late next year. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.
Returning inflation to target within a reasonable timeframe remains the Board’s priority. 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. To date, medium-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.
The recent data are consistent with inflation returning to the 2 to 3 per cent target range over the forecast period 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.
There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers, and higher interest income. And globally, there remains a high level of uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, 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. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
