While today’s decision by the Reserve Bank (RBA) to hold interest rates at 4.1% for the third consecutive month was by no means unexpected, the market is divided over whether further rate hikes might be on the cards.

A softening of key economic indicators over recent months suggests that the rate hiking cycle peaked in June, with monthly Consumer Price Index (CPI) indicators revealing a further easing in the headline inflation rate.

The RBA expects inflation to return to the target range in late 2025. But in his missive to the market today, outgoing RBA governor Dr Philip Lowe reiterated the potential need for additional rate hikes to achieve this outcome.

Given the difficulty reducing services inflation, which remains persistently high, some economists suspect governor-designate Michele Bullock will have to resume raising rates again later this year.

Also weighing on Bullock’s mind is a continuation of China’s economic slowdown, which could only exacerbate goods inflation.

Most investors expect a lengthy pause in rate hikes, however, National Australia Bank economist Taylor Nugent suspects there’s one more rate hike in store, taking the cash rate to 4.35% on 7 November.

While Shane Oliver, chief economist at AMP, didn’t expect a rate rise today he warns Australians to brace for more bad news in future months.

“Inflation is still too high, and several key areas are still seeing very strong and accelerating inflation – notably rents, electricity and insurance costs — and higher petrol prices may boost inflation again in August,” he said.

Runaway rent

While annual inflation fell in July to 4.9%, down from 5.4% in the year to June and 8.2% over the 2022 calendar year, CPI rents remain a primary inflationary driver.

The monthly CPI indicator reveals a 7.6% jump in the cost of rents in the year to July, up from 7.3% in June. The trend indicates no slowdown in growth for rents paid.

With CPI rents showing an 18-month lag, relative to CoreLogic’s timelier rental index – which has recorded a fourth consecutive month of slowing rental growth – the company’s Research Director, Tim Lawless suspects rental prices are likely to add to inflationary pressures going forward.

“It may be too soon for a pause in the cash rate to have a significant impact on purchasing demand,” notes Lawless.

“A more robust recovery in housing market activity is likely to be constrained by high interest rates and affordability hurdles in the short-term.”

A pause in the cash rate makes for a more optimistic market, but Lawless believes consumer confidence has a long way to recover before getting back to a neutral setting.

While a rise in new listings activity may also test buyer demand, and lead to milder growth in housing values, towards the end of 2023, Lawless reminds buyers that this is still very much an uncertain and thinly traded upswing.

Casualties of higher rates

Unsurprisingly, borrowing power has taken a swan dive since the RBA started raising rates in May 2022. Based on Compare the Market’s figures, the amount a single person (on an income of $75,000) can borrow has dropped from $511,100 to $366,90.

The purchasing power of a family with two kids and a household income of $150,00 has fallen by 28% to $623,400 since May 2022.

RateCity also notes that a cash rate of 4.1% has severely impacted repayments for over 3 million Australian households with mortgages since May 2022:

  • $500,000 loan: Repayments up $1134 a month.
  • $750,000 loan: Repayments up $1701 a month.
  • $1 million loan: Repayments up $2269 a month.