The Reserve Bank of Australia’s (RBA) final meeting for 2023 brought a sigh of relief to Australian families as the bank decided to pause interest rate hikes, providing a much-needed respite from the financial pressure of rising mortgage costs. This decision marks a significant moment, considering the steady increases in the cash rate over the past year.
In December 2022, the RBA had increased the cash rate by 25 basis points, bringing it to a new high of 3.10% (source). However, in the most recent decision, the central bank chose to maintain the cash rate at 4.35%, a level established in November after a period of stability at 4.10% for four months (source). This pause is seen as a move to avoid further financial strain on households already grappling with the increased cost of living and higher mortgage repayments.
For average borrowers with a $500,000 mortgage, the rate hikes over the year have cumulatively added significant amounts to their monthly repayments. Just the November increase alone added around $76 per month to these repayments, contributing to a total additional expense of $1210 since rates began rising in May 2022 (source). An increase in December to 4.6% would have further raised typical repayments on such a mortgage by another $78 (source).
Despite this pause, the RBA remains vigilant regarding inflation trends. The bank is ready to raise rates further if inflation surprises on the upside. This approach underscores the RBA’s commitment to returning to the inflation target without undue delay, indicating that future rate hikes are still a possibility (source). The upcoming release of quarterly Consumer Price Index (CPI) data at the end of January 2024 is expected to be crucial in determining whether interest rates have reached their peak (source).
The decision to pause rate hikes in December follows recent CPI figures, which showed a headline inflation ease to 4.9% in October, a noticeable decline from previous months. However, underlying inflation, a key metric for the RBA, remained higher at 5.3%, suggesting ongoing inflationary pressures in the economy (source).
In conclusion, the RBA’s decision to hold the cash rate steady offers temporary relief to Australian households. However, the path ahead remains contingent on evolving economic indicators, particularly inflation trends, and the RBA’s commitment to maintaining price stability.