RBA should hold on rate rises
Off the back of softer spending data, and because the Reserve Bank of Australia (RBA) kept the cash rate steady this August, there are many economists who suggest that the RBA is done with raising interest rates. On the other hand, there are economists who believe we’re at a critical moment in the economic cycle, and that there are just too many risk factors at play to be confidently saying that the RBA is done with raising rates. These more conservative economists believe we could push towards or even past a cash rate of 4.6 per cent which would mean a few more rate rises – not what we want to hear. We look at this in more detail with a few graphs, and what our borrowers could expect, in this month’s update.
Rates rises to pause
Consumer price index (CPI) numbers released on July 26 were somewhat softer which encouraged the RBA to hold our cash rate steady. Some economists believe that this pause is a signal that the RBA is waiting and watching closely to see where we are really at in the economy, given the lagged effects of all these rate rises.
Bill Evans, Westpac’s chief economist, believes the RBA looks to have done enough raising, and won’t need to do anything else for a while.
According to the RBA, we are now at the halfway point in the fixed rate cliff where 880,000 fixed rate mortgages roll off and onto significantly higher rates, after 12 rate rises since May 2022.
Evans from Westpac believes that the economy is looking likely to slow down and there’s not likely going to be a need for further rate rises. Even if the next round of data shows that inflation is sticking around, he doesn’t believe Philip Lowe, the RBA Governor, will raise rates at his final meeting on September 5 before he is replaced by Michelle Bullock.
Data suggests we're not out of the woods
Economists, such as Warren Hogan from Judo Bank, sit on the other side of the fence.
He suggested in a presentation to us mortgage brokers during the week, that this move to hold rates in August, could prove to be wrong. He believes that the RBA should have taken the opportunity, to really close the lid on inflation, and should have raised rates again. This could have been a chance to add to the insurance, against stubborn inflation and add to the May and June rate rises.
The data shows that inflation is still at 6 per cent, well above the 2 to 3 percent target range that the RBA has. Spending is still high, productivity and unemployment is still low, and wages are rising. When you add the number of people receiving wage increases, versus decreases, these factors combined put a lot of pressure on the RBA.
Population growth, is still continuing and turning into employment. At the same time, it's creating demand for goods and services in the country which is exacerbating the inflation problem.
Retail spending according to the most recent CPI figures is yes, slightly down in 2023, but still very high. Retail sales figures in isolation, or the numbers for hospitality (cafes), show that both are significantly higher than pre-COVID levels and people are still eating out a lot or packing their homes with goods.
While yes, things are slowing as you can see with some of these graphs starting to plateau, it’s not clear at all that the RBA is anywhere near where it needs to be yet. The data doesn’t suggest that anything is really under control.
The cost of living pressures along with these rate rises are hurting more people than others and it’s tough to think that we could actually be in for more rate rises.
Banks are more accommodating
In response to these rate rises, and for those coming off higher fixed rates, our banks have more initiatives to tackle some of these challenges faced by borrowers.
Those who need to refinance but are tight on a serviceability front, are allowed favorable assessments to be completed with lower rates which makes it easier to service the debt on the bank's calculators, and easier to move to a better deal. Instead of being assessed at 3 per cent above the borrower rate as per the Australian Prudential Regulator of Australia's (APRA) rule, those looking to refinance dollar for dollar can be assessed at 1 per cent above the borrower rate.
For those who are unfortunately finding themselves in difficult situations, and this lower buffer rate or a restructure doesn't work as a solution, the banks have dedicated Financial Hardship teams that assist with moving to interest-only repayments, or even temporary suspensions.
Cash backs and more
There are only a small handful of banks offering cash backs these days to encourage those to refinance and competition is still extremely strong. Borrowers just need to be careful of banks increasing their rates, outside of the cycle or without the RBA changing the official cash rate as cost of fund pressures mount. We've seen a few banks position themselves as the cheapest on the market for a short period, then not too long after, raise their rates which then made them no longer competitive as they worked out it wasn't profitable to be that cheap anymore.
Finally
The data does show that inflation is cooling and with all these rate rises you would think that the RBA has done enough for now and that they can wait and see the lagged effects. But there are just so many inflation pressures, underpinned by wage rises, population growth, low unemployment, and more, to confidently say that we are done. With fewer cash backs, some lenders raising rates out of cycle, lower serviceability buffers to help those that need to refinance, there's a lot to be aware of as a borrower these days and much to keep us mortgage brokers on our toes.
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