At its October meeting, the Reserve Bank of Australia (RBA) left the cash rate on hold for the fourth meeting in a row at 4.1%.
The pause in interest rates over the last four months comes after the biggest interest rate increase cycle (400 basis points over 14 months) since the late 1980s.
The rate increases since April last year mean that a variable rate borrower with a $600,000 mortgage will have seen around $1,300 a month added to their mortgage payments. That’s $15,600 a year!
It’s important to remember that rate increases generally impact the economy with a lag of a year or more. This is because it takes a while for the increases to be passed through to borrowers and for them to adjust their spending and for this to impact companies and jobs.
As well as increased mortgage repayments, there is other evidence that rate increases are biting:
- Real retail sales have fallen for three quarters in a row and are very weak on a per capita basis.
- A sharp slump in building approvals points to weak home building.
- GDP growth has slowed to a 1.6% pace in the last two quarters.
- Labour market indicators including job vacancies and hiring plans in surveys have started to cool and unemployment looks to have bottomed.
The good news is that inflation has fallen from a peak of 8% (late last year) to a current rate of approximately 5%. Whilst this is still above the RBA’s goal of 2% – 3% long-term, inflation should continue to fall next year, due to the lag effect of the higher rates.
Therefore, staying on hold provides further time for the RBA to assess the general economic outlook.
Whilst we cannot rule out another rate rise later this year, (possibly 0.25% in November or December), it’s probable that the cash rate has (almost) peaked.
