Home owners will be slugged with another rise in mortgage repayments after the Reserve Bank raised its interest rates for the 10th time in a row on Tuesday, taking its target to a decade-high of 3.6 per cent.
But interest rate relief may be on the horizon – RBA boss Philip Lowe says inflation appears to have peaked in January.
“Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand,” Dr Lowe said.
“Services price inflation remains high, with strong demand for some services over the summer.”
Dr Lowe’s March comments, published on Tuesday, also dropped lines from February that flagged “further increases in interest rates” in 2023.
That has now changed to “further tightening in monetary policy” in the March statement (without a plural).
These may seem like minor changes. But when it comes to central banks then economists believe reading between the lines is crucial.
Doing so reveals a growing sense that the RBA’s record run of hikes is nearing its peak amid weaker-than-expected economic data.
Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics, said the April and May meetings will be “really line ball” with the first pause in rates in a year now “on the table”.
“There’s a signal there,” Mr Langcake said.
“It’s not a rolled-gold guarantee … but it says there’s a real material chance now that we see just one more [interest rate hike].”
Matt Simpson, senior market analyst at City Index, also believes that the RBA’s March comments are a sign of a dovish pivot in coming months.
“The RBA have removed a key hawkish sentence from the February statement, and that is another step closer to the end of their tightening cycle,” he said.
‘Cruel the economy’: Rate hikes pile up
Tuesday’s rate hike was the 10th in a row and the second for 2023, with the RBA having raised its cash rate target from a record-low 0.1 per cent in May to 3.6 per cent today.
That increase has piled an extra $983 onto monthly repayments for a $500,000, 25-year home loan, according to RateCity figures – that equals more than $11,700 in repayments every year.
This monumental squeeze is intended to reduce the capacity of families to spend more money on goods and services, making it more costly for businesses to increase their prices further – as they would lose customers.
The RBA says that process is ongoing, with the full effect of rate hikes yet to be felt across the economy.
However, slower economic growth in the December quarter has been taken as a sign that it’s starting to work.
Against that backdrop, pressure is growing on the RBA to pause rates and wait for additional data on the economy in the early months of 2023.
Deloitte Access Economics boss Pradeep Philip said the latest interest rate hike is “hard to understand” amid data showing a slowing economy.
“The RBA should pause rate hikes, or it will overshoot and cruel the economy,” Dr Philip said.
‘Important shift’
There are now more signs the RBA is considering such a pause.
Commonwealth Bank chief economist Gareth Aird said on Tuesday that the RBA has struck a “less hawkish tone” and “softened” its guidance.
The bank forecasts another rate hike in April for a peak of 3.85 per cent.
“[Dr Lowe] made a very important shift in forward guidance,” Mr Aird said.
“This change does not preclude the RBA from raising the cash rate more than once from here, but it means that the board is not convinced that it needs to hike the cash rate multiple times more.”
Luke Hartigan, a lecturer in economics at the University of Sydney, said the RBA is pointing to a “turning point” in inflation, with monthly figures showing the Consumer Price Index (CPI) fell in January.
However, he cautioned the RBA will want to see a “persistent decline” in price growth before it starts talking about ending its run of rate hikes.
“It looks like the CPI is at a turning point,” Dr Hartigan said on Tuesday.
“But the monthly indicator is still experimental … I don’t think the RBA would be using it as a definitive indicator.”
With that in mind, Mr Langcake said upcoming data about price growth in the March quarter and the performance of the jobs market over February and March will be crucial to the rate outlook.
The RBA wants to see evidence the economy has continued to cool in the new year and that the pace of price growth, particularly for services, is showing signs of easing.
“With every rate increase we’re naturally getting closer to the peak,” Mr Langcake said.
“The chances of them pausing after one more hike is now greater than it was a month ago because of the way the recent wage growth and [December quarter] GDP data played out.”
