RBA are set to keep interest rates on hold at 3.60% at its next meeting, Tuesday 2 May 2023 but it will be a line-ball decision.

Last week’s inflation data was a sobering reminder that inflation is going to be a difficult beast to break.

While annualised inflation reduced from 7.8% to 7.0% it was expected to fall further. The January and February inflation numbers gave us hope that the March quarter’s inflation number could make a bigger dent to inflation’s downside trajectory—but it didn’t.

This signals that the inflation genie is going to be stickier and harder to get back into the RBA’s 2%-3% target-range-bottle. Higher-for-longer inflation unfortunately means that interest rates are also likely to remain higher for longer. 

RBA wait & see mode

The RBA is now in a wait and see mode. They will be wanting to see the lag effect on the economy associated with the following two key factors;

1. How the speed and magnitude of the RBA interest rate hikes to date, continues to impact the economy, along with 
2. How much impact the fixed rate loan cliff has on the economy when these loans transition to higher variable interest rates 

The full effect of the RBA’s interest rate rises have been delayed to an extent by the approximately 35% of loans coming off fixed rates. As the bulk of fixed rate loans were set for 2, 3 and 4 years The majority of these loans will mature in the back end of 2023 and the first half of 2024. 

For example – a $500K 30 year P&I loan coming off a 2% fixed rate and reverting to a 5.5% variable rate will now cost the borrower $34,068pa. This is a jump of an additional $991 per month. 

Obtaining commercial credit is becoming harder and more expensive

Commercial credit has also become tighter from 2 perspectives;

1. Higher interest rates are making it a lot harder for borrowers to achieve 1.5x interest cover benchmarks
2. Credit has become more expensive due to the fear generated from the collapse of several overseas banks and bank deposit runs. Consequently local banks are being more selective in how they hand out money and the price they put on it.  

Interest rates in Australia most likely on hold for a while

I think interest rates are going to be on hold for a lot longer than we all expect. As the economy slows in the second half of 2023, it will be interesting to see how many months the RBA keeps interest rates at 3.6%. 

The easiest way for the RBA to manage inflation lower is to keep interest rates on hold as the economy softens. As this happens the RBA will likely maintain a tightening interest rate bias and continue spooking consumers with tough talk around the potential for higher interest rates to curtail spending.

Moving Forward

The key pieces of data the RBA will be watching carefully to guide their interest rate settings are monthly unemployment and quarterly inflation reports. The June quarter inflation report will be released on 26 July 2023. It’s quite possible that interest rates may be on hold until at least August 2023.

Do you think the RBA has done enough? 

Let’s see!