No Xmas miracle for borrowers as RBA continues to hold

The Reserve Bank of Australia (RBA) has held the official cash rate at 4.35% in its final monetary policy meeting for 2024.

Today’s (10 December) cash rate decision marks the eighth consecutive hold since it was last raised by 0.25% in November 2023.

The RBA’s next meeting will not be held until Monday 17 February, with the decision being announced on 18 February 2025.

Following the decision, the Reserve Bank stated that sustainably returning inflation to target within a reasonable timeframe remains its highest priority.

This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.

While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.

The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint.

The RBA acknowledged that the data on inflation and economic conditions “are consistent with these forecasts” and that it has gained some confidence that inflation is moving sustainably towards the coveted target range.

As has been the case for most of the year, the RBA stated it will continue to rely upon data and the evolving assessment of risks to help guide its decisions.

The board still does not see inflation returning sustainably to the midpoint of 2.5% until 2026.

While this was not the “festive season gift borrowers were hoping for”, the cash rate being held does not come as a surprise.

It follows a warning from Governor Bullock that recent falls in headline inflation may be short-lived due to Federal Government rebates that have kept the price of energy bills low and put downward pressure on inflation.

Until the Reserve Bank is satisfied that inflation can stay within its target of 2-3% over a sustained period, households will have to hold out for the long-awaited cash rate cut.

The RBA is likely to keep rates on hold throughout the first quarter of 2025 barring any “external shock or significant shifts in unemployment or underlying inflation.”

Although headline inflation is within the 2-3% target, underlying price pressures, stickier components of inflation, and a resilient labour market have prevented an interest rate cut this year.

Households remain under pressure and consumers remain cautious, choosing to save a large portion of July’s tax cuts. Although employment growth continued and the unemployment rate held steady at 4.15% in October, the labour market has softened over the past year. Slowing employment and inflation may prompt rate cuts from May 2025.

Rates will likely be on hold until the second quarter of 2025, with the likelihood of rates coming down next year.

I think that 2025 will present positive tail winds with rate cuts more than probable.