6th October 2022 / Sarah Lowry: What Does the Reserve Bank's Latest Move Mean?

At its most recent monthly board meeting, the Reserve Bank of Australia (RBA) lifted the official cash rate by 25 basis points to 2.6%. With most economists bracing for another supersized increase of half a percent, it was an unexpected reprieve for mortgage holders.

PropTrack senior economist, Eleanor Creagh, said that it's now clear that the RBA is taking its foot off the accelerator in respect to interest rates.

"We got a hint that the board may soon adjust the pace of tightening when there was a shift in the language used in the minutes from the August meeting," Ms Creagh said.

Whilst much smaller than anticipated, the rate hike will put some further strain on household budgets and comes on top of broader sustained cost-of-living pressures. Some mortgage brokers note that home buyers have become more wary of borrowing the maximum amount they qualify for, as the fear of further interest rate rises weighs on their future financial decisions.

Vaughan Clark, senior finance broker with Clark Finance in Melbourne, said that buyers were less willing to push themselves financially, especially if another rate rise was on the horizon.

Some though, are still applying for as much as possible, because the amount they can borrow has fallen faster than property prices have. The latest PropTrack Home Price Index Report shows that the pace of property price falls in September had slowed "significantly".

We are still seeing strong results achieved, as vendors are increasingly switched on to the new market in which buyers' budgets are more constrained. National prices were down only 0.19% in September, the smallest price fall since national prices started to fall in April 2022.

In its statement accompanying the decision, RBA Governor Philip Lowe said that the hike will "help achieve a more sustainable balance of demand and supply in the Australian economy." Further, he said that "the size and timing of future interest rate increases will continue to be determined by the incoming data and the Board's assessment of the outlook for inflation and the labour market." The RBA confirmed its determination to return inflation to its 2-3% target.

Ms Creagh notes that whilst inflation expectations have risen, the lift has been more moderate than seen internationally – something that's true for the inflation rise itself.

"In combination with wage pressures that remain more modest in Australia, the board has been able to begin to ease off the gas with respect to their tightening cycle," Ms Creagh said. "These conditions give the RBA some room to slow the pace of their tightening cycle. It has exercised this and opted for a smaller hike, which is a more conventional step point."

Both buyers and sellers will certainly be keeping an eye on RBA decisions for the remainder of spring, as we experience a relatively solid but perhaps more subdued selling season.

Note: This article is of a general nature only and not intended to be used as financial advice. Please seek your own advice from a financial professional.