Interest rates on hold, again.

Interest rates on hold. Latest data doesn’t support a rate cut (as hoped), instead, it could suggest a rate hike if inflation doesn’t cool further. The RBA maintained interest rates at 4.35% in the first meeting of 2024. With inflation still tracking higher than the target, the RBA is holding firm with its wait and see approach of 2023.

Cash Rates, Inflation, Wages Growth and Asset Pricing

• On 6 February 2024, the RBA left the cash target rate unchanged at 4.35%, with its exchange settlement balances also unchanged at 4.25%. Inflation remains persistently higher than the target range. While unemployment remains at historically low levels, with Australia’s global trading partners’ GDP growth remaining healthy, it would appear that there is no signal that could seriously give the RBA any reason to reduce interest rates; in fact, the data suggests the opposite is more likely.
• In deciding to maintain rates unchanged this month, the RBA commented, “While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”.
• The most recent RBA chart pack released on 12 February 2024 provides some interesting insights that appear to be overlooked by the doom and gloom of the newspaper editorials. The chart pack tells a fairly positive global story. The GDP of our major trading partners is positive and in line with the past 10-year average; India’s and China’s GDPs appear particularly strong (although somewhat lower than historical averages), and inflation for our trading partners is returning to normal. Labour markets remain tight globally with positive wage growth; however, consumer sentiment is at its lowest in 20 years.
• Aside from another global health emergency, we continue to think that any rate cuts are overly optimistic, and any hope of it should be dismissed as a distraction.

Exhibit 1: GDP, Inflation and RBA Cash Rate

Exhibit 2: Wage Growth and Unemployment

Exhibit 3: Annual House Price Movements

Funding Costs

• Based on the latest analyst polls, there is less than a 4% chance of a rate decline and a 96% chance of no change at the next RBA meeting. We expect no change at the next few meetings unless there is a material change in inflation or other economic conditions.
• Over the summer period, there have been no major changes in the rates offered by lenders; this is notwithstanding the lowering rate decreases by many analysts. Either the lenders don’t expect the RBA rate cuts, or they are seeking to hold onto as much margin as possible when and if there is a decrease in interest rates. In any case, there appears to be an opportunity for borrowers to save by considering the 3-year fixed rate.

Exhibit 4: Reserve Bank of Australia Assets

Exhibit 5: Australian Government Bond Yield

Exhibit 6: Household Income and Consumption

Exhibit 7: Housing Loan Commitments

Implications on Interest Rate Outlook

• Consensus forecasts expect us to be at peak rates for this cycle and for rates to decrease in the short term. We are not convinced about this and expect that our current interest rates will remain at this level for the medium term in what we consider to be the long-term average.

Exhibit 16: Impact of Interest Rate Forecasts and Fixed Rates on $1 million borrowing

Recommended Strategies

Given the expectation for no further interest rates, and/or a small change up and/or down we are recommending to clients that they take the following actions:

• Consider splitting facilities between variable and 3-year fixed rates
• Review existing facilities for discounts via refinance
• Ensure your tax returns are ready for lodgement to enable access to funding, and
• Position for opportunities.

Most importantly reach out to your Cashel Relationship Manager or directly to me, should you need assistance and advice with any borrowing needs.