Christmas relief as RBA pauses interest rates, but will it last?

A pre-Christmas interest rate pause is welcome news for millions of families struggling with high mortgage bills, but the relief might not last.

The Reserve Bank on Tuesday ended the year with a reprieve for home owners, putting the cash rate target on ice at 4.35 per cent.

It will stay there until at least February, sparing mortgagees from another jump in monthly repayments, which have already risen more than $1200 on a typical $500,000, 25-year loan since May 2022.

But Australians shouldn’t get too comfortable, with RBA boss Michele Bullock on Tuesday leaving the door open to a fresh mortgage squeeze.

It comes after Bullock said last week that households were coping “fine” with higher mortgage repayments and would be able to handle more.

“There are still significant uncertainties around the outlook,” Bullock said in a statement on Tuesday.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks.”

‘Tightening bias’ retained for interest rates

The course for mortgage bills will ultimately be determined by incoming data on inflation and jobs, with the all-important December-quarter Consumer Price Index (CPI) set to be delivered on January 31.

That will be just in time for the RBA’s first meeting of 2024 in February, with central bankers wanting to see headline inflation fall from 5.4 per cent to 4.5 per cent and on track to hit at least 3 per cent by late 2025.

Against that backdrop, Indeed APAC economist Callam Pickering said households should be alive to the possibility of another hike in 2024.

Though it’s also possible that the cash rate target has now hit its peak.

“The RBA will maintain their tightening bias until domestically-driven inflation shows signs of clear moderation or significant cracks appear in the Australian economy,” Pickering said.

“While there is still risk of further rate hikes, with a February rate hike not out of the question, we won’t be surprised if rates have peaked.”

Oxford Australia head of macroeconomic forecasting Sean Langcake is among those predicting another hike, saying the December-quarter inflation data “won’t look good”.

He said central bankers are right to be worried about services inflation – including rents, energy, hospitality and personal care like hairdressing.

“The next move is up, based on everything that’s in the [December] statement,” Langcake said.

“There’s an upside risk that services inflation gets persistent and does what it has overseas.”

Commonwealth Bank chief economist Gareth Aird takes a different view, saying that while services prices remain key to RBA thinking, the latest real-time data suggests price pressures are easing heading into the new year.

That includes NAB’s monthly business survey and the Melbourne Institute’s monthly inflation gauge.

“We don’t anticipate any further increases to the cash rate,” Aird said.

“But [we] acknowledge the near-term risk sits with another 25bp rate hike (the next board decision is February 6).”

ANZ’s head of domestic economics Adam Boyton agreed that the RBA has maintained its tightening bias heading into 2024, but predicts 4.35 per cent is where the target will stay until the first cuts late next year.

“Before we get to that point, however, the risk of further RBA tightening cannot be ruled out,” he said.

Tuesday’s RBA meeting was not just the final one of 2023 but also the last meeting under the existing central bank structure.

From February RBA board meetings will last multiple days and only take place in eight months of the year.

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