‘We might have to raise, we might not’: Bullock

The Reserve Bank of Australia (RBA) has opted to maintain the cash rate at 4.35 per cent.

Following discussions on 6–7 May, the monetary policy board announced its final rate decision for May on Tuesday afternoon (7 May), revealing that it will be holding the official cash rate at its current level.

The last time the cash rate moved was in November 2023, when the RBA lifted rates for the 13th time since the tightening phase commenced two years ago (in May 2022).

‘We might have to raise, we might not’

According to RBA governor Michele Bullock, the monetary policy board “did discuss the option of raising interest rates [and] discussed the option of keeping interest rates where they were”.

“On balance, the board felt that, at the moment, staying where [rates] are was appropriate. We think that policy is currently restrictive. That doesn’t rule out that we might have to raise rates but it doesn’t mean we will have to raise rates. So there was a discussion about it, but the board decided on balance to stay where it was,” Bullock said.

Reflecting on the last rate hike (in November 2023), Bullock said: “At the time we talked about [how] we thought the risks had shifted a little bit to the upside and we were taking out a little bit of insurance. It‘s true that the data towards the end of last year and early this year led everyone to sort of think: ‘Oh, it‘s okay now’. [But] I think we’ve always felt that it was a bit too soon to declare victory [on inflation] and I think the numbers in recent weeks have demonstrated that for us.

“We don‘t think we necessarily have to tighten again, but we can‘t rule it out. If we have to, we will. If we really think that inflation is going to be persistent and significantly above our forecast, we will tighten again. But the board made the judgement at the meeting that the right stance at the moment is to stay where we are and continue to observe what‘s going on in the economy. We‘re data driven. And, as I said, we might have to raise, we might not.”

In the post-meeting statement, the board said that, in the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices and higher-than-expected services price inflation, which is now forecast to decline more slowly over the rest of the year.

The monetary policy decision said: “Inflation is, however, expected to decline over 2025 and 2026...

“Returning inflation to target within a reasonable time frame remains the board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the board is not ruling anything in or out. The board will rely upon the data and the evolving assessment of risks. In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.

“The board remains resolute in its determination to return inflation to target.”

What does the industry think?

Reacting to the decision, Mortgage Choice chief executive Anthony Waldron said the decision to keep the cash rate on hold would be welcomed by borrowers, who are likely also hoping for cost-of-living relief when the federal budget is handed down next Tuesday (14 May).

“While the latest inflation data may have dashed borrowers hopes of a cash rate cut in the near future, I suspect the RBA will wait to see the Federal Budget and June quarter CPI before considering any changes to the cash rate,” he said.

Waldron said that Mortgage Choice home loan submission data had shown that the vast majority of borrowers were still favouring variable-rate home loans given the expectation that Australia may be nearing its cash rate peak.

“With rates looking likely to stay on hold for the coming months, those in a position to buy their first or next home should consider meeting with their broker to understand their borrowing power,” he said.

Eleanor Creagh, the senior economist at real estate appraiser PropTrack, said the “sustained pause” in the cash rate reflected “the expected easing in inflation still to come as the economy, businesses, and consumers continue to adjust to the full impact of significant interest rate tightening delivered since May 2022”.

“Although inflation has not fallen as quickly as expected early in the year, retail sales and consumption are weak, and consumer sentiment remains low,” she said.

“Despite higher-than-expected inflation in the March quarter confirming the challenging journey towards lower inflation, the board remain[s] forward looking, anticipating further decline in inflation by the end of the year.

“Although higher-than-expected inflation in the March quarter has pushed back the expected timing of rate cuts [to November], most still expect that the next move for interest rates will be down. However, the timing remains uncertain.”

Creagh said she expected that house prices would lift further in the months ahead (albeit at a slower rate given the winter period is typically quieter for the property market), particularly in tandem with rate cut expectations being pushed further out.

Meanwhile the chief economist of credit reporting agency CreditorWatch, Anneke Thompson, said that while services inflation was “proving harder to nudge down”, the RBA was “no doubt well aware that the cash rate has far less impact on services inflation than it does on goods inflation, and thus a further increase would do little to help move services inflation into the band at a faster pace”.

She said: “It is likely that the next few months’ employment figures will have a key influence on any future cash rate decision that the RBA makes.

“The various measures of the labour force released by the ABS monthly will give the RBA a good yardstick as to which way this argument should fall over the next few months. Even moderate softening of the employment market will likely mean that we are at the peak of this tightening cycle, as smaller businesses and many household businesses will now be in precarious financial positions given the high cost of debt.

“The RBA is unlikely to risk further damage to sectors of the economy that are least able to cope with it.”

Are hikes on the horizon?

While the general consensus was for the central bank to hold the cash rate at 4.35 per cent, in updates last week, ANZ’s economics team said it didn’t expect the RBA to “explicitly discuss a rate hike” this month but suggested its language would be more hawkish than it was in March.

Westpac Group chief economist Luci Ellis had said that a scenario necessitating a rate hike was “not impossible” but added it was “unlikely” and would “only take shape later in the year”.

Meanwhile, Gareth Aird, CBA’s head of Australian economics, had said he believed the RBA monetary policy board “may consider” the case to raise the cash rate in May but didn’t believe the current data was “sufficiently strong” for the RBA to begin tightening policy again.

More industry members have been saying in recent weeks that rate hikes may be “inevitable” to quell inflation, however.

Judo Bank’s chief economic adviser Warren Hogan had previously said that the SME-focused bank has changed its central case economic forecast to project a peak cash rate of 5.10 per cent in 2024, given the flow of economic data recently, while the CEO of aggregation company Finsure, Simon Bednar, had said a rate rise was “inevitable”.

“I think the reality that will be sinking in for mortgage holders is we will not see any reduction in rates during 2024, as we previously thought we would,” the Finsure CEO said.

“With the possibility of further rate increases for mortgage holders, brokers will be helping customers cope with the headwinds.”

The next cash rate decision will take place on 17–18 June, with the decision being handed down at 2:30pm on 18 June.

[Related: A rate rise may not be imminent, but is it inevitable?]