There was a palpable sigh of relief yesterday as the Reserve Bank of Australia spared borrowers further distress, opting to keep interest rates steady.
It was the third consecutive meeting where central bank figureheads maintained the official cash rate at 4.1%.
That may be little consolation for the majority of borrowers, however, with the RBA having already passed on 12 interest rate hikes since it began tightening monetary policy back in May, 2022.
This decision was anticipated by just about every economist and finance analyst, so the news won’t come as a surprise.
Instead, it is the future direction for monetary policy that remains a little uncertain, particularly in light of the leadership changeover at the RBA.
Yesterday’s meeting was the last to be chaired by Philip Lowe, whose tenure as RBA Governor was not extended by the government.
Instead, Michele Bullock will take on the role of RBA Governor for a seven-year term commencing September 18.
Where to next for interest rates?
The key factor prompting the central bank to hold the official cash rate steady was the recent release of inflation data.
Annual inflation fell more than expected in July, reaching 4.9%. That was influenced by reduced consumer demand and an improvement in global supply chains. The figure was also a marked improvement compared with June, when inflation came in at 5.4%.
In line with the decision, there were few changes to the RBA’s accompanying statement following its Board meeting.
However, one factor that outgoing RBA Governor Philip Lowe did mention was the deteriorating Chinese economy, which has clouded the outlook for the local economy.
As it stands, the central bank is mindful that the uncertainties associated with China could have a bearing on its monetary policy decision-making. If anything, this positions the RBA towards a ‘holding’ bias.
The other risk factors that remain on the table are well documented - sticky inflation, particularly in the services sector, and how households fare as mortgage repayments jump significantly once they roll onto fixed rates at much higher levels.
Regardless, the RBA has stated that it is currently in a “calibration” period where further adjustments to monetary policy would only come about if there are surprises in the economic data that follows.
More specifically, the central bank stated the following commentary in its statement: “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”.
Looking forward, there is a general consensus that we are near the terminal rate level, but there are mixed views as to whether one final rate hike may be necessary amid persistently high services inflation.
While ANZ, Westpac, and Commonwealth Bank believe the RBA will keep rates unchanged until the end of the year, NAB sees one more rate hike in November, which would take the official cash rate to 4.35%.
If anything, the conversation has started to shift towards predicting the first rate cut. Most of the experts believe this will occur next year, although the timing varies between different parties.