Rate hike considered but not yet appropriate: RBA board

After having gathered over 6–7 May, the monetary policy board released the decision this afternoon (7 May), detailing that it does not yet believe the time is right to move the official cash rate.

The last time the cash rate moved was in November 2023, when the central bank increased the rate for the 13th time since the tightening cycle began in May 2022.

The market and economists from Australia’s big four banks had largely expected the cash rate to remain on hold this month, outlining that while inflation remains outside of the central bank’s target range, there are signs that inflation is moderating.

Board still not ruling anything in or or out

In the press conference following the rate decision, RBA governor Michele Bullock said that the board had discussed the possibility of a rate hike this month but “on balance the board felt that ... staying where they are was appropriate”.

“We think that policy is currently restrictive. That doesn't rule out that we might have to raise rates but it doesn't mean we will have to raise rates. So there was a discussion about it, but the board decided on balance to stay where it was,” she said.

“If we saw that inflation expectations were starting to shift and that it was going to take markedly longer to come back into target, then we might have to be thinking about whether or not there needs to be an interest rate rise, but at the moment that’s not our central forecast.”

The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2–3 per cent in the second half of 2025, and to the midpoint in 2026.

‘Path of interest rates ... remains uncertain’

In the post-meeting statement by the RBA, the board noted that the “persistence of services inflation is a key uncertainty” adding that it is expected to ease more slowly than previously forecast as a result of “stronger labour market conditions including a more gradual increase in the unemployment rate and the broader under-utilisation rate”.

It added that, in the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices and higher-than-expected services price inflation, which is now forecast to decline more slowly over the rest of the year.

The monetary policy decision said: “The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the board is not ruling anything in or out. The board will rely upon the data and the evolving assessment of risks. In doing so, it 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.”

Broking industry reacts

Many in the broking industry expected the decision, as did most of market and major bank economists, with just 8 per cent of the ASX Rate Indicator (the 30-Day Interbank Cash Rate Futures contract) expecting an interest rate increase.

Reacting to the decision, Mortgage Choice chief executive Anthony Waldron said: “The Reserve Bank’s decision to keep the cash rate on hold at 4.35 per cent follows the release of the March quarter CPI Index by the Australian Bureau of Statistics, which showed that while inflation came in higher than expected, it has been trending down since December 2022.”

Waldron said that the decision to keep the cash rate on hold would be welcomed by borrowers, who are likely also hoping for cost-of-living relief when the federal budget is handed down next Tuesday (14 May).

“While the latest inflation data may have dashed borrowers hopes of a cash rate cut in the near future, I suspect the RBA will wait to see the Federal Budget and June quarter CPI before considering any changes to the cash rate,” he said.

“With rates looking likely to stay on hold for the coming months, those in a position to buy their first or next home should consider meeting with their broker to understand their borrowing power.”

Mark Haron, the executive director at Connective, said that the May decision “gives Aussies some breathing room, especially after the recent higher-than-expected inflation figures”.

“It’s still a challenging and uncertain environment for the lending landscape – and borrowers are relying on and expecting even more from their brokers to help them make informed decision,” he said, adding that brokers should “proactively communicate with their clients about their financing options and the benefits that extend beyond interest rates”.

Rate hikes may be on the horizon

However, there is a growing cohort who expects that the tightening cycle may not yet be over.

The CEO of brokerage Home Loan Experts, Alan Hemmings, expects the next move in the cash rate to be a rate increase, for example.

Speaking to The Adviser last month, Hemmings said: “I think there might be one or two [rate increases] in the next eight months if needed.

“And then we see some cuts next year, but I don’t think we’ll see a cut this year either.”

Indeed, the CEO of aggregation company Finsure, Simon Bednar, has said that cash rate hikes would be “inevitable” while inflation remains out of the RBA’s target band of 2–3 per cent.

He said: “Rather than try and nip it in the bud now, they will be waiting to see the next quarterly data given the highly charged nature of another rate rise after the cash rate was increased 13 times over the past two years.

“I think the reality that will be sinking in for mortgage holders is we will not see any reduction in rates during 2024, as we previously thought we would.

“With the possibility of further rate increases for mortgage holders, brokers will be helping customers cope with the headwinds.”

The next cash rate decision will take place on 17–18 June, with the decision being handed down at 2:30pm on 18 June.

[Related: Next RBA move may be an increase: Brokerage CEO]