Interest rates Australia: Reserve Bank leaves interest rates on hold in July at 4.35 per cent

The Reserve Bank has paused the rate hikes for only the second time this year but the relief is likely to be short-lived because inflation is still too high.

The cash rate was left on hold at an 11-year high of 4.1 per cent, following the July board meeting during the school holidays.

This marked only the second monthly pause since April, with interest rates since May 2022 surging at the most aggressive pace since 1989 with 12 increases in 13 months.

Reserve Bank of Australia Governor Philip Lowe, whose seven-year terms ends on September 17, hinted this pause was only likely to be temporary after a peak in the consumer price index or headline inflation.

‘Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline,’ he said on Tuesday afternoon.

‘Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.’

The Reserve Bank has paused the rate hikes for only the second time this year but the relief is likely to be short-lived

Inflation in May moderated to 5.6 per cent, down from 6.8 per cent in April, but the annual pace was still well above the RBA’s 2 to 3 per cent target – with the RBA expecting the CPI to remain high until mid-2025.

Annual repayments on an average, $600,000 mortgage are still $17,556 higher than they were 14 months ago when the cash rate was still at a record-low of 0.1 per cent.

Since then, variable mortgage rates have risen from levels starting with a ‘two’ to a zone where even a borrower with a 20 per cent deposit will now be paying 6.44 per cent with the Commonwealth Bank.

In 2023 so far, borrowers have only had a reprieve in January – a month when the RBA doesn’t meet – and April, along with July, with the relief coinciding with school holidays. 

Reserve Bank of Australia Governor Philip Lowe (pictured right with deputy Michele Bullock), whose seven-year terms ends on September 17, hinted this pause was only likely to be temporary after a peak in the consumer price index or headline inflation

The latest pause surprised the big four banks, which had all expected a July increase. 

But Westpac senior economist Matthew Hassan said the RBA was still likely to hike rates two more times, taking the cash rate to 4.6 per cent.

‘We think there’s still another two interest rate hikes,’ he told Sky News.

Dr Lowe hinted inflation could remain high – leading to another interest rate rise – if strong wages growth didn’t lead to productivity improvements, causing  companies to pass on the costs to consumers.

‘Wages growth has picked up in response to the tight labour market and high inflation,’ he said.

‘At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.’

Dr Lowe said the 12 rate rises since May 2022 were squeezing some borrowers.

‘The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending,’ he said. 

‘While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.’

In June, house prices rose in every state capital city except Hobart with CoreLogic data showing Sydney values rising by two per cent to $1.324million.

Treasurer Jim Chalmers has indicated he will, this month, announce whether Dr Lowe’s term is extended or if he is replaced. 

His deputy Michele Bullock, Department of Finance secretary Jenny Wilkinson and Treasury secretary Steven Kennedy are regarded as the leading candidates.

The Reserve Bank is expecting economic growth – or gross domestic product – to halve from 2.7 per cent at the end 2022 to just 1.25 per cent by the end of 2023 as a result of its rate hikes.