- 10 Dec 2024
- By API Magazine
Mortgage stress is at an alarming level but the RBA was above such considerations in keeping the interest rate on hold at 4.35 per cent.
With 40 per cent of borrowers saying they are unprepared for interest rates to remain high in 2025, the Reserve Bank of Australia’s decision to keep interest rates on hold Tuesday (10 December) will cause more stress than surprise.
The RBA held the cash rate at 4.35 per cent at its end of the December board meeting, with rate cuts unlikely to land in pockets until well into the new year.
They certainly won’t come in the next two months, as the RBA takes its longest ever break between meetings. The Board will next reconvene on 18 February.
A survey released Tuesday by Canstar revealed that of those with an owner occupier mortgage, only 60 per cent feel financially prepared for interest rates to remain elevated into 2025, while 28 per cent say they are not prepared and 12 per cent are unsure.
Aussies with the average home loan size of $641,416 are now paying $3,958 per month on repayments on average.
That’s $1,453 more per month – $17,436 more per year – than they were paying before the RBA started lifting the cash rate in May 2022.
Sally Tindall, Canstar Data Insights Director, said the consensus was growing that the RBA won’t be firing off a rate cut at its first meeting in 2025.
“Australia’s economy continues to limp along with last week’s National Accounts recording an increase in GDP of just 0.8 per cent for the year through to September 2024, which was below market expectations.
“However, this result won’t be enough to push the RBA into cutting rates soon, particularly with unemployment holding steady at 4.1 per cent and trimmed mean inflation rising in the monthly dataset to 3.5 per cent per annum.”
The prospects of an eventual rate cut may come down to politics and psychology rather than economics.
This was evident when the market moved to price in an April rate cut upon the passing of the RBA legislation that sets up a separate monetary policy committee.
The government will have the opportunity to appoint the members of a new board, prompting many to speculate on a convenient pre-election rate cut.
Graham Cooke, head of consumer research at Finder, said many can’t wait much longer for a downwards move from the RBA.
“Thousands of stressed homeowners can’t manage much longer with soaring mortgage costs smashing household budgets.
“While we expect the RBA to start cutting the cash rate next year, many will struggle through the festive season with less money to spend than in previous years.”
Source: Finder, RBA. *Owner-occupier variable rate. Repayments based on the average loan of $641,416 (ABS data analysed by Finder).
Evgenia Dechter, Associate Professor, UNSW, didn’t foresee an imminent cut to the official cash rate.
“Over the past few quarters, we have observed stable unemployment, low GDP growth with high government spending but weak private consumption and investment, and declining inflation, though core measures remain above target.
“This creates a complex mix for the RBA, however, given stable unemployment and inflation still above the target, a cash rate cut soon is highly unlikely.”
James Morley, Professor of Macroeconomics at The University of Sydney, said a panoply of factors would prevent the RBA cutting rates in the first half of 2025.
“The labour market remains robust in Australia and the RBA is clearly worried about underlying inflation remaining outside the target range,” he said.
“The economic effects of policies from the Trump administration are uncertain, but a heightened risk of higher global inflation will also make the RBA more cautious about cutting rates until a range of inflation measures are solidly and persistently in the target range.
“I don’t see the RBA bringing rates down towards a more neutral level, which is itself uncertain, until the second half of 2025.
“Of course, this could change if there is a large shock to the global economy in the meantime.”
While interest rate stability at the high end is suppressing property prices, housing affordability continues to worsen as prices nationally drift upwards.
An expected interest rate cute in 2025 could result in another property market boom, but the likes of Canberra, Sydney and Melbourne would experience relatively strong declines if they don’t materialise.
RBA giving no indication of budging
While markets are pricing in a rate cut in the first half of 2025, the RBA continues to make it clear that it does not expect underlying inflation to reach the midpoint of its target band of 2 to 3 per cent until 2026.
The RBA’s Monetary Policy Decision on Tuesday noted that while headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.
“The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint.
“Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target.”
Inflation has fallen substantially since the peak in 2022, as higher interest rates have been contributing towards demand and supply moving closer towards balance. Measures of underlying inflation are around 3.5 per cent, which is still some way from the 2.5 per cent midpoint of the inflation target.
“Taking account of recent data, the Board’s assessment is that monetary policy remains restrictive and is working as anticipated.
“Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close.”
One of those easing upside risks is wages growth, which has slowed in the last few months.
“Wage pressures have eased more than expected in November.
“The rate of wages growth as measured by the Wage Price Index was 3.5 per cent over the year to the September quarter, a step down from the previous quarter, but labour productivity growth remains weak.”
