The RBA cash rate is on hold – now what?

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The Reserve Bank of Australia (RBA) has kept the cash rate on hold for the tenth consecutive month. However, the likelihood of an official cash rate rise before Christmas has increased.

At its first meeting of the new financial year on Tuesday, the RBA kept the official cash rate at 1.5%, citing the gradually improving global economy and local inflation for its decision. Following the announcement, investors are pricing in a rate hike by the board at around 75% over the next 12 months.

“Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of household indebtedness. Lenders have also announced increases in mortgage rates for investor and interest-only loans,” RBA Governor Philip Lowe said in an official statement.

Tim Lawless, head of research at CoreLogic, said it was “no surprise” that the RBA had kept the cash rate on hold once again. “The decision comes on the back of upbeat labour market reports, with unemployment falling to 5.5% since the last meeting and a trend towards more job advertisements,” he said.

While the jobs market appears to be strengthening, other factors remain subdued. Wages growth is tracking along record lows at only 1.9% per annum and core inflation is below the target range of 2%-3%, according to Lawless. “Furthermore, a steady cash rate from the RBA against increasingly hawkish sentiments in Europe and the US stand to put downward pressure on the Australian dollar. This would serve as a welcome boost to Australian exports.”

Housing market is showing signs of slowing

The latest macro-prudential constraints imposed by Australia’s regulators appear to be doing their job. “The housing market is showing signs of slowing, with CoreLogic’s home value indices reporting a 0.8% rise in dwelling values over the June quarter; the lowest quarterly growth rate since December 2015,” Lawless said.

A controlled slowdown in housing market conditions would provide some comfort to policy makers that the latest macro-prudential constraints are working to cool the high rate of capital gains in the eastern capitals.

“While the cash rate has remained on hold, the same can’t be said for mortgage rates, which have been edging higher since September last year. Arguably, higher mortgage rates have done much of the heavy lifting in slowing down home value appreciation and cooling investment demand,” Lawless said.

There is a consensus among analysts that lenders will continue their out-of-cycle mortgage rate hikes, despite a steady cash rate setting. Lenders are trying to adjust their credit policies to accommodate the latest round of mandates imposed by the Australian Prudential Regulation Authority (APRA).

“We expect investment activity will continue to moderate across the housing market, which could dampen housing market conditions further. Slower housing market conditions and improvements in employment markets are certainly positive outcomes; however if wages growth and inflation remain subdued we can expect the cash rate to remain on hold over the short term,” Lawless said.

It may be time to review your loan

Due to ongoing mortgage rate hikes, both owner-occupiers and investors should review their loans.  
“We’ve seen a differential between principal and interest on owner-occupied mortgages, and now we’re starting to see the introduction of ‘penalty interest’ for owner-occupied mortgages where it’s interest only,” said Ben Kingsley, chair of the Property Investment Professionals of Australia (PIPA). “What we need to do is track that differential. We need to think about it in terms of how it affects our personal household budget …if a differential is starting to get too big, it becomes time to start talking to your professional broker.”    

As those margins continue to grow, it’s challenging to work out whether it’s better to stay put at interest-only or move to principal and interest. According to Kingsley, one option is to “potentially split [the loan] out into a portion of principal and interest to get the lower interest rate and a portion of interest-only.

He stressed that switching from interest-only isn’t always the best move. “It is still very much the case that interest-only could be the best option for you right now if you want to continue to build out your property portfolio,” Kingsley said.   

Related stories: Should The RBA Put An End To Ultra-Low Interest Rates?

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