The RBA has left its cash rate target unchanged at 4.1 per cent — and home owners aren’t the only ones breathing a sigh of relief.
A mortgage borrower with a $500,000 loan will now not have to foot another $77 in mortgage repayments come August or September — which is when an interest rate hike on Tuesday would have kicked in or been taken out of their bank account.
But the central bank’s decision surprised the market once again.
That, ladies and gentlemen, is what’s known as a relief rally.
The market put a great value on companies in an instant as their future borrowing costs were lowered … for now.
And that’s the major point here.
In the final paragraph of the Reserve Bank governor Philip Lowe’s statement on Tuesday he said: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve.”
That word “may” is crucial.
It’s the Reserve Bank’s way of saying another interest rate hike is not urgent.
It wants time to assess the economy.
The big wildcard for the RBA
The May inflation measure from the Australian Bureau of Statistics showed headline inflation fell from 6.8 per cent to 5.6 per cent.
The RBA took note of this, saying on Tuesday: “Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline.”
That said, the core or underlying measure of inflation, is still above 6 per cent.
Which explains why Lowe went on to say: “But inflation is still too high and will remain so for some time yet.”
The big question is whether the interest rate decisions that the RBA has already announced, which are yet to hit household budgets, will tip the economy over and into recession.
Several measures of the economy show many Australian households — whose response is the big wildcard for the RBA — are holding up OK.
The jobs market remains tight (notwithstanding some weakness in terms of job vacancies), wages growth is beginning to pick up, the last measure of retail sales was stronger than expected, and the property market is showing further signs of strength.
It was this shopping list the RBA pointed to in June to justify its decision to raise its cash rate target to 4.1 per cent.
Since then, however, at least one measure of inflation has come down substantially.
That same measure of inflation included volatile items like petrol prices, holiday travel and the prices of fruit and vegetables.
But the more, can I say, realistic inflation measure — the June quarterly CPI — will be published July 26.
A narrow path
The Reserve Bank is desperate for Australia to avoid a recession — a recession which would have its building blocks in too much money printing, surging immigration, corporate price gouging and a jobs bonanza.
So, it’s taking a breather for now.
It’s walking its narrow path to inflation success, but many in the market still forecast more interest rate hikes by the RBA.
“Today’s rate pause is sure to be a welcome breather for many mortgage holders and provides some certainty for family budgets especially over the school holidays,” NAB Home Ownership executive Megan Bond said.
“While rates have stayed on hold today, the NAB Economics team is predicting another couple of rises and we know it takes time for the full effect of interest rate increases to filter through.”