Rates On Hold But RBA Adjusts Their Stance

As predicted last week the RBA left interest rates on hold. This in itself is not particularly newsworthy however the commentary around November's RBA meeting did carry some discussion points that should be reviewed.

For the first time since our world changed early last year, the RBA has acknowledged that inflation is now increasing which in turn could mean rates are set to rise earlier than first predicted.

Corelogic released an article on Thursday that discussed the RBA's November meeting. The article focussed on some potential outcomes that usually transpire after higher than expected inflation numbers which inevitably lead to higher interest rates. One paragraph from the Corelogic article that all current and future sellers should take note of stated that "An early lift in interest rates poses additional downside risk for housing values. We are already seeing the rate of house price appreciation ease due to affordability pressures, rising stock levels and, as of November 1st, tighter credit conditions. Once interest rates start to lift, there is a strong chance that housing prices will head in the opposite direction soon after."

With many banks already lifting their fixed rates in anticipation of an earlier than expected lift in rates and economists almost universally agreeing that rates will start to rise next year, our property markets may potentially now be at their highest point.

As you will also see in our attached online articles today, a realestate.com.au article from earlier this week suggests that just 35% of Australians now believe that it is a good time to buy. Significantly less than at any other stage during the current cycle.

The full Corelogic article entitled " Rates on hold but RBA adjusts their stance" is the central article in this week's report. The full article is below.

Rates on hold but RBA adjusts their stance

As foreshadowed late last week, the RBA has abandoned their yield curve target, discontinuing their objective to keep the Australian government bond yield at 0.1%.  The other facets of monetary policy were held firm, with the RBA keeping the cash rate at 0.1% and continuing to purchase government securities at the rate of $4 billion per week until at least mid-February 2022. 

According to the RBA, scrapping the yield target reflects improving economic conditions as well as a higher and earlier than expected inflation outcome – a reference to the 2.1% core inflation reading recorded over the year to September 2021. The RBA board has reiterated their stance that the cash rate won’t move higher until inflation is sustainably within their 2-3% target range, implying a requirement for tighter labour markets and a ‘material’ boost in wages growth before the inflation requirement is met.  

Private sector economists are increasingly predicting the timing for a rate hike could be brought forward, potentially as early as the second half of next year, although the RBA has reiterated they will be ‘patient’ in their decision making around higher rates, noting the RBA now expects core inflation to reach the midpoint of their target range by the end of 2023.  A further rise in core inflation could see the RBA adjusting their expectations for the inflation objective to be met even earlier.

An early lift in interest rates poses additional downside risk for housing values.  We are already seeing the rate of  house price appreciation ease due to affordability pressures, rising stock levels and, as of November 1st, tighter credit conditions.  Once interest rates start to lift, there is a strong chance that housing prices will head in the opposite direction soon after.

Although a consideration of housing market conditions does not feature within the RBA’s mandate, housing trends do have a flow on impact to stability risks such as lending quality and household indebtedness.  Arguably, the recent trends towards slower growth in housing values, and less housing credit growth, will help to lessen the risk of further macroprudential measures.