The Board’s decision was widely anticipated, with all major bank economists in agreement that today’s announcement would be to hold after the CPI indicator revealed annual inflation fell faster than expected over the 12 months to December 2023. 

Leaving the cash rate target at its current level since November 2023 is meant to give the central bank breathing room while inflation remains above its 2%-3% target band.

“Inflation continued to ease in the December quarter. Despite this progress, inflation remains high at 4.1%,” the board said in its 6 February monetary policy decision announcement.

“While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks.”

The Board cited high services inflation, which it expects to decline gradually as demand moderates and growth in labour and non-labour costs eases. 

“Returning inflation to target within a reasonable timeframe remains the Board’s highest priority,” the RBA said, while admitting “it will be some time yet” before inflation returns to target range. 

RBA’s February Statement on Monetary Policy (SOMP), released simultaneously with today’s announcement, highlights its economic outlook and the factors that influenced the central bank’s decision today:

  • Overall demand has remained above the economy’s capacity to supply goods and services, which continues to put upward pressure on inflation.
  • Consumption growth is expected to come back to pre-pandemic levels over the next couple of years.
  • Labour market conditions are expected to continue to ease, to be broadly consistent with sustained full employment and inflation at target. 
  • Inflation is expected to decline to the 2-3% target range in 2025 and to reach the midpoint in 2026

“The Board’s decision today balances the objectives of bringing inflation down while also preserving the gains in employment.”

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”

Tightening cycle over, according to experts

Since May 2022, the RBA has hiked the cash rate 13 times in a bid to stabilise inflation, which peaked at 7.8% in December 2022. 

As the latest quarterly price index showed inflation is tracking down towards RBA’s target band, experts predict the Board’s tightening cycle is over with cuts likely to begin in the second half of 2024. 

“Headline inflation came in at 0.6% over the December quarter, the lowest growth in consumer prices since March 2021 and below the RBA’s forecasts,” PropTrack economist Anne Flaherty said.

“This continues the trend of declining annual growth in consumer prices and increases the probability that interest rates have hit their peak in the current cycle.”

Earlier this week, CommBank economists said they expect the cash rate to sit at 2.85% by the second half of 2025 after two 75 basis points’ worth of cuts this year and next year.

Westpac’s economic team, on the other hand, tipped the easing cycle to begin in September with 1.5 rate cuts factored in by year-end. 

RBA’s decision: A ‘false hope’ or a ‘good news’?

In light of today’s decision, experts are wary that the RBA might be giving borrowers a “false sense of security”. 

“We all want to see rates come down and mortgage holders desperately need it, but the last thing we want is for the RBA to act too soon and then have to readjust and increase them again,” said Peter White AM, managing director of Finance Brokers Association of Australia (FBAA).

“Consumers need stability at this time, not volatility.”

The cash rate largely influences the interest rate on products such as home loans, savings, term deposits, and more. A higher RBA cash rate is generally not as good news for mortgage holders as it is for those parking their money in deposits. 

In anticipation of RBA’s decision, several lenders have already begun cutting variable and fixed interest rates on home loans.

Similarly, term deposit products have been trending downwards in the past weeks.

Ms Flaherty welcomes RBA’s decision to take a breather, which could help ease the ongoing housing crisis. 

“Today’s decision is good news for the housing market which looks set to benefit from a more stable interest rate environment in 2024,” she said.

“Greater confidence around where interest rates are sitting should support further recovery in buyer and seller confidence.”

Photo courtesy of RBA