Interest rates: RBA holds the cash rate at 4.35 per cent as inflation slows

The Reserve Bank of Australia (RBA) has held the cash rate at 4.35 per cent during its first meeting of the year, in line with market expectations, following last week’s consumer price index (CPI) figures which showed annual inflation had plunged to a two-year low.

“This is the peak for the cash rate, and I actually think everyday Australians will assume that too,” says Domain chief of research and economics Dr Nicola Powell.

“What Australians will be looking forward to is when the cash rate is cut, because many mortgage holders are struggling. People want that break; they want a little bit of relief, and that’s very likely to come [at] some point this year.”

Centre for Independent Studies chief economist Peter Tulip says “most people in the market are expecting rates to stay on hold for a few meetings and then fall in the next few months – and fall relatively substantially over the next year or two”.

He believes rates will have declined by 3.5 per cent by next year if inflation continues to decrease, which is good news for anyone feeling the cash-rate pinch.

The quarterly CPI, an indicator of inflation, rose by 0.6 per cent in the December 2023 quarter – the smallest quarterly rise since the March 2021 quarter. Annual inflation fell to 4.1 per cent, still above the RBA’s 2-3 per cent target, but back at its lowest level since 2021.

“While prices continued to rise for most goods and services, annual CPI inflation has fallen from a peak of 7.8 per cent in December 2022, to 4.1 per cent in December 2023,” says Australian Bureau of Statistics head of prices statistics Michelle Marquardt.

Although annual inflation is falling faster than the Reserve Bank expected – it was tipped to finish the year at 4.5 per cent – Tulip says it’s too soon to celebrate the low CPI numbers. 

“A lot of it reflected on one-off temporary factors that are not going to keep cutting inflation,” he says. “For example, government measures; their cost-of-living relief like rental relief and the electricity rebates took about half a percentage point off the inflation growth.

“I don’t think the government will repeat that and, in fact, some of those things were temporary, and they will go away. We’ll see a rebound from that in the CPI over the next year.”

University of Sydney macroeconomics professor Dr Mariano Kulish says the annual inflation of 4.1 per cent is still too high, and the upcoming stage three tax cuts might further increase prices.

“They should increase interest rates again,” he says. “And the reason is that inflation is still very high.”

However, Powell believes the tax cuts won’t affect inflation as many economists fear.

“Australians will be very mindful of how much they flex this additional cash because I think that people have really tightened their belts. There’ll be some element where some people will want to save any spare cash they have to keep it for a rainy day,” she says.  

Mozo finance expert Rachel Wastell welcomes the hold.

“It looks like the inflation figures and everything [are] heading in the right direction,” she says. “We are achieving what [former RBA governor Phillip Lowe] said: ‘A narrow path to a soft landing.’ 

“It looks like it is the peak of the rate-hiking cycle, but what I think is interesting is watching the big banks be split on how soon the rate cuts will come.”

Many potential home buyers may now be waiting for interest rate cuts before they enter the property market,  but Wastell says banks are constantly moving their rates.

“There are moves happening behind closed doors that don’t make the news,” she says. “It’s really important that mortgage holders keep an eye on their rate and don’t stick their head in the sand, essentially, and make sure they know what they are paying to see if they could get a better deal somewhere else.

“The housing market doesn’t look like it’s slowing down. If you are a potential home buyer and you’re just like, ‘I’ll wait for the first rate cut,’ the house price is going to rise by more than that per cent.”