RBA Newsflash: May 2024

Updated May 7th 2024

The Reserve Bank of Australia (RBA) has opted to maintain the cash rate at 4.35%.

Following discussions on the 6-7 of May, the monetary policy board announced its final rate decision for May this afternoon (7 May), revealing that it will be holding the official cash rate at its current level.

The last time the cash rate moved was in November 2023, when the RBA lifted rates for the 13th time since the tightening phase commenced in May 2022.

This 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 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.

Loan submission data had shown that the vast majority of borrowers were still favouring variable rate home loans given the expectation that Australia may be nearing its cash rate peak.

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.

The “sustained pause” in the cash rate reflected “the expected easing in inflation still to come as the economy, businesses, and consumers continue to adjust to the full impact of significant interest rate tightening delivered since May 2022.

Although inflation has not fallen as quickly as expected early in the year, retail sales and consumption are weak, and consumer sentiment remains low.

Despite higher-than-expected inflation in the March quarter confirming the challenging journey towards lower inflation, the board remain forward looking, anticipating further decline in inflation by the end of the year.

Although higher-than-expected inflation in the March quarter has pushed back the expected timing of rate cuts (to November), most still expect that the next move for interest rates will be down. However, the timing remains uncertain.

House prices may lift further in the months ahead (albeit at a slower rate given the winter period is typically quieter for the property market), particularly in tandem with rate cut expectations being pushed further out.

Meanwhile while services inflation was “proving harder to nudge down”, the RBA was “no doubt well aware that the cash rate has far less impact on services inflation than it does on goods inflation, and thus a further increase would do little to help move services inflation into the band at a faster pace.

It is likely that the next few months’ employment figures will have a key influence on any future cash rate decision that the RBA makes.

The various measures of the labour force released by the ABS monthly will give the RBA a good yardstick as to which way this argument should fall over the next few months. Even moderate softening of the employment market will likely mean that we are at the peak of this tightening cycle, as smaller businesses and many household businesses will now be in precarious financial positions given the high cost of debt.

The RBA is unlikely to risk further damage to sectors of the economy that are least able to cope with it.

Are hikes on the horizon?

While the general consensus was for the central bank to hold the cash rate at 4.35% today in updates last week, ANZ’s economics team said it didn’t expect the RBA to “explicitly discuss a rate hike” this month but suggested its language would be more hawkish than it was in March.

Westpac Group chief economist Luci Ellis had said that a scenario necessitating a rate hike was “not impossible” but added it was “unlikely” and would “only take shape later in the year”.

Meanwhile, Gareth Aird, CBA’s head of Australian economics, had said he believed the RBA monetary policy board “may consider” the case to raise the cash rate in May but didn’t believe the current data was “sufficiently strong” for the RBA to begin tightening policy again.

More industry members have been saying in recent weeks that rate hikes may be “inevitable”” to quell inflation, however.

Judo Bank’s chief economic adviser Warren Hogan had previously said that the SME-focused bank has changed its central case economic forecast to project a peak cash rate of 5.10% in 2024, given the flow of economic data recently, while the chief executive of aggregation company Finsure, Simon Bednar, had said a rate rise was “inevitable”.

“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,” the Finsure CEO said.

The next cash rate decision will take place on 17–18 June, with the decision being handed down at 2.30 pm on 18 June.