Just this time last month, some economists were optimistically talking about the potential for a rate cut sooner rather than later.
Red-hot inflation was moderating, retail spending was down, and three of the big four banks tipped that the official cash rate had finally peaked. The landscape for borrowers was looking relatively steady at long last.
But now, those hopes have all but evaporated with the release of internal notes from the Reserve Bank of Australia and growing concern about global inflation, particularly in the United States.
The RBA meets again on November 7 2023 – Melbourne Cup Day – to make a call on whether to lift the official cash rate, leave it on hold, or reduce it.
The RBA’s current mood
Minutes from the RBA board’s last meeting at the start of the month have just been released.
They show the RBA is concerned about rising property prices, which continue to tick upwards across much of the country. They’re now 6.6 per cent higher at a national level since January.
It’s also clearly growing impatient with the sluggish pace with which inflation is cooling.
The minutes make for interesting reading because the RBA is a very conservative institution and chooses its language carefully, and rarely alters it.
This month, for the first time, it said: “The board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”
Reading between the lines, the rapid increase in interest rates over the past 18 months isn’t working to curb inflation as quickly as the RBA wanted. So, it’ll carefully look at new data in the coming week in the form of inflation and unemployment figures.
What might happen next?
A growing number of economists now say an interest rate hike next month is possible, but it all depends on what quarterly inflation data looks like next week.
Inflation is the measure of cost increases to goods and services households buy. It has been running at dangerously high levels for some time, which prompted this long run of rate hikes.
It has dropped significantly, down from a peak of 8.4 per cent in December to 5.2 per cent currently. But the August reading ticked upwards slightly from the 4.9 per cent recorded in July, and that’s a problem.
The bulk of that increase is thanks to rising oil prices. They’re on the up again as a result of the Israel-Palestine conflict, so there’s little relief on the horizon.
Andrew Mirams, Intuitive Finance’s Managing Director says “I’m not a betting man, but I wouldn’t be surprised if the cash rate rose by 25 basis points next month. If it were to remain on hold, there’s a likelihood that the reprieve will be short-lived, with a December hike possible if inflation doesn’t continue to drop”.
How are rates set?
The RBA meets on the first Tuesday of every month, with the exception of January, to set the country’s official cash rate. It’s the rate that money markets, including home lenders, use to help determine the cost of their products.
So, when the cash rate goes up, your mortgage interest rate does too. When the cash rate goes down… well, most of the time your lender will follow suit. Although, not always by quite as much.
The RBA takes into account a number of economic measures when deciding which way to go.
Inflation is a big one, as we’ve seen in recent times. The RBA has a target range for inflation, aiming to keep it between two to three per cent. So, we’re a way off from reaching that.
The board also looks at the level of employment, which is a good measure of how the economy is performing. If too many people are out of work, it might lower the cash rate in order to encourage investment and spending, therefore creating new jobs.
Australia’s economy is an important factor. If growth is sluggish, the RBA may pull an interest rate lever to spur consumers and businesses to spend (and borrow).
You could still find a lower rate
Regardless of what the RBA does next month (November 2023), there could be opportunities for borrowers to save.
It emerged this week that the Commonwealth Bank lost market share in the lucrative home lending market for the first time in five years. That’s a scenario it won’t want to continue for too long.
Competitors like NAB, ANZ and Westpac are picking up those customers and should the trend continue, expect CBA to pull out the stops to lure in new customers. Competition between the big banks is ultimately good news for borrowers.
And there are some enticing deals out there at the moment, from cashbacks to discounted interest rates.
It pays – literally – to work with a qualified mortgage broker to assess your personal circumstances and current loan arrangements to see if there’s a better option out there.
Finding a great broker requires a little effort on your part, but it will pay handsome dividends in terms of finance success. If you’re looking to secure funds for your next purchase, why not reach out to our team at Intuitive Finance for a chat.
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