RBA pauses cash rate ahead of holiday season

With inflation coming in cooler than expected, the Reserve Bank of Australia gave homeowners a welcome gift this holiday season, pausing the cash rate at 4.35%.

Most economists saw this coming, with 82% (31/38) predicting a hold in December’s Finder survey. Many pointed to wages finally keeping up with inflation, suggesting the economy might be on the right track.

But the hangover from 13 rate rises is still being felt, with the lagged effect biting into household budgets. So, while there’s a breather this month, the financial strain isn’t over for many Australians.

Reserve Bank governor Michele Bullock (pictured above far left) said while the economy has been experiencing a period of below-trend growth, it was stronger than expected over the first half of the year.

“The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation,” said Bullock, who was appointed to her role in September.

“Overall, measures of inflation expectations remain consistent with the inflation target.”

Interest rate pause a “welcome breather”

The RBA’s decision came as no surprise for many in the mortgage industry too, which has witnessed firsthand the dampening effect of prior rate rises on consumer spending and overall affordability.

“The pause is a welcome breather, providing an opportunity for the market to absorb the recent economic shifts and for consumers to adjust their financial planning,” according to Matt Fernihough (pictured above centre left), executive officer of mortgage management company FinSecure.

“An unchanged rate at this juncture sends a reassuring message to borrowers, potentially instilling a sense of confidence that we are near the summit of the rate hike cycle,” said Fernihough, whose company, FinSecure, aims to expand in 2024.

“This perceived stability could be a crucial factor in helping individuals to consolidate their financial strategies and make informed decisions moving forward, without the added pressure of imminent rate increases.”

RBA decision made to “avoid panic”

The soaring cost of living has wreaked havoc on many families in 2023, with nearly 80% of Aussies affected.

Because of this, Niti Bhargava (pictured above centre right), director of Melbourne-based brokerage Resolve Finance Derrimut, said she also expected the cash rate pause over the holiday season, mostly “to avoid panic in the market”.

Graham Cooke (pictured above far right), head of consumer research at Finder, said everything from housing to groceries, petrol and energy costs was affected, and economic conditions were “some of the worst in decades”.

“Aussies with a $600,000 mortgage are forking out roughly $1,349 more per month than they were before the RBA started lifting the cash rate in May last year,” Cooke said.

That’s an additional $16,000 over a year in mortgage repayments alone.

Average Aussie mortgage repayments

And many borrowers are resorting to tapping into savings, with 35% of households having already accessed money from their redraw or offset account to cover their repayments and cost of living expenses, according to a recent Canstar survey of mortgage holders.

The effects of the Reserve Bank’s rate rises

The effects of the RBA’s relentless tightening of the cash rate are reflected by the drastic change in mortgage products.

Before the May 2022 cash rate rise, there were 5,199 owner occupied and investment rates listed on Canstar below 5.50%, now is just one – a three-year fixed rate at 5.48% offered by Australian Mutual Bank.

The lowest variable rate on Canstar as of May 1, 2022 (prior to the first cash rate rise) was 1.58%, compared to December 4, 2023 when the lowest variable rate is now 5.69% – a huge difference of 4.11 percentage points.

This came as refinancing activity reached its peak in July, tapering down in the months after – although there are still a considerable amount yet to refinance off these low rates.

However, there are still savings to be made, providing brokers with the chance to add great value.

Switching a $500,000 loan with a 30-year loan term from the average variable rate of 6.88% to the lowest variable rate of 5.69% could cut repayments from $3,286 per month down to $2,899 – a saving of $387 per month or $4,644 per year.

Will there be another RBA rate hike in February?

With the last cash rate decision for 2023 done and dusted, the focus now turns how the Australian economy will fare over the new year.

Bhargava said this period next year would be “really interesting” when it came to interest rate rises. She hoped there would be no more rate rises over the first half of 2024.

“Over the holiday period, at least it will give them the opportunity to celebrate with their loved ones and for first home buyers they can still keep boosting their savings while working on their borrowing capacity,” said Bhargava, who had recently opened up her new office.

“The pause will help in stabilising their emotions.”

Fernihough agreed, saying that the cash rate had reached its peak and “we’re on the cusp of witnessing” a gradual resurgence of market confidence.

“This optimism is predicated on the belief that, over the next few months, there will be a clearer delineation of market positions, improved affordability, and an overall uptick in economic sentiment,” Fernihough said.

From AustralianBroker

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