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A month of reprieve was all Australia’s central bank afforded borrowers as it opted to lift the cash rate for the 11th time since last May.
Almost exactly 12 months from its first cash rate increase of the current cycle on 3 May 2022, the Reserve Bank of Australia (RBA) voted to raise the cash rate by 0.25 per cent to 3.85 per cent at its monthly board meeting on 2 May 2023.
Described by Tim Lawless, CoreLogic’s research director, as a “line ball” call, the RBA’s decision follows recent Australian Bureau of Statistics (ABS) Consumer Price Index (CPI) data, which indicated inflation has passed its peak.
In announcing the rate hike, RBA’s governor, Philip Lowe, agreed that inflation had passed its peak, though he noted that its current level “is still too high and it will be some time yet before it is back in the target range.”
He described the importance of guiding inflation into its target range as warranting the rate increase, explaining that “the Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook.”
“While the recent data showed a welcome decline in inflation, the central forecast remains that it will take a couple of years before inflation returns to the top of the target range,” Mr Lowe added.
Real Estate Institute of Australia (REIA) president Hayden Groves expressed disappointment at the Board’s call, believing they could have waited until additional economic information was available at its next meeting in June, including retail trade, business turnover, household spending, and labour force data to “assess the impact of 10 successive past increases.”
His sentiments were shared by Dean Milton, chief operating officer at the Real Estate Institute of Queensland, who explained that “there’s barely been time for the market to absorb the lagged impact of the previous 10 consecutive rises and reassess the approach based on this.”
He believes the RBA’s “whiplashing back to another interest rate rise” adds to the pain currently felt by Australian households, exacerbated by “regulatory chaos from state and federal governments.”
“It’s difficult to see how would-be buyers can catch a break when their borrowing capacity has been on such unsteady footing,” he added.
Current economic conditions have already begun stifling future housing supply, with building approvals down while lending statistics point to further declining buyer activity, pushing the home ownership dream further from the reach of many Australians.
He explained that Queensland’s inflation is primarily driven by electricity, up 32.5 per cent, and health, up 6 per cent, throughout the quarter, which interest rates have no impact on.
“It’s time for the state, federal, and local governments to do their part in fighting inflation,” he declared.
Mr Lawless believes the most recent rate hike may be the last of the current cycle before adding that his firm’s most recent Home Value Index (HVI), which found national house prices climbed for the second consecutive month running, supported the RBA’s rate rising decision.
“Although housing considerations aren’t part of the RBA’s mandate, a return to a more positive housing trend could be accompanied by a lift in consumer attitudes, supporting consumption, and potentially keeping inflation higher for longer,” he said.
In his eyes, raising interest rates in May could “dampen some of the recent housing exuberance,” though he noted several additional factors, such as low supply, tight rental markets, and increasing migration, exist to boost the sustained stabilisation of home values.
Only time will tell if the RBA’s latest action will send the positive housing direction in the opposite direction, though he ratified CoreLogic’s position that “the market will continue to level out on the expectation that interest rates have peaked and the imbalance between housing demand and supply will persist for some time yet.”
According to Canstar, the RBA’s latest cash rate increase will add approximately $82 to the monthly repayments of borrowers with a 30-year $500,000 loan.
Mr Milton concluded that “fiscal policy needs to match monetary policy, and [what] we need now is action to remove impediments to new housing supply, investment in social housing, and a focus on overall spending to ensure it does not lead to further increases in inflation.”
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