RBA Governor’s warning to homeowners: Don’t bank on further interest rate cuts

A “hawkish” Reserve Bank has given mortgage holders some reprieve but has warned that a red hot labour market will be the key sticking point for any future cuts.

In reducing rates for the first time in four years by 0.25 per cent to an official cash rate of 4.1 per cent, Ms Bullock quickly hosed down market predictions that more rate cuts were coming. The major banks almost instantaneously passed the rate cut through in full for home loans.

“I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the market are coming,” Ms Bullock said.

“We have to be careful not to get ahead of ourselves. The truth is that some inflation pressures remain, and cost of living pressures are still front of mind for many.”

In its monetary policy statement the Bank called out “unexpectedly strong” labour market data that had tightened further in the latter half of the year.

Most of the strength in the labour market had come from public sector jobs, the RBA noted accounting for three-quarters of aggregate employment growth since mid-2023.

“Strong labour demand in the non-market sector has likely contributed to tighter conditions in the market sector,” the Bank wrote, drawing in workers and contributing to tight conditions facing firms in other industries.

That tightness was pushing up against an uptick in private sector growth in the second half of the year.

Given Australia’s low productivity rate, Ms Bullock was concerned that any increase in demand could result in wage growth that would prevent inflation returning to 2.5 per cent from its current level of 3.2 per cent.

She said while markets were “optimistic” she said the Bank would be much more data dependent.

“Let’s wait to see what is exactly happening to the labour market. Is that feeding through to wages pressure, and is it feeding through to inflation?” she said.

Election-sized elephant

A relieved-looking Treasurer Jim Chalmers said the RBA had handed millions of Australians the rate relief they “need and deserve”, seizing on the decision as proof Labor’s economic strategy had worked and that the worst of the inflation crisis was over.

But he acknowledged the cut wasn’t the solution to every problem, and when asked whether he was prepared to tell people things would only get better from here, Dr Chalmers said “I wouldn’t go near any of that sort of language”.

“The worst of the inflation challenge is now a couple of years behind us, but we have to stay vigilant. We can’t be complacent. You won’t hear … anything other than recognition from us that people are still under pressure,” he said.

Shadow treasurer Angus Taylor said while the rate cut was welcome, it had taken too long and households had felt prolonged pain, because of Labor’s economic mismanagement.

“Despite the welcome cut today, it’s a long journey back to the standard of living Australians had when these interest rate increases began,” he said.

“And we know that the critical issue now for government is to accelerate that pathway back, accelerate the pathway to restoration of Australian standard of living, that they had when the interest rate increases began.

“That means beating inflation once and for all, sustainably beating inflation.”

Asked whether the Coalition was preparing to announce cost-of-living policies in the lead up to the election, Mr Taylor said his focus was on “economic management”.

“You cannot beat a cost-of-living crisis if you can’t manage the economy,” he said.

Meanwhile, Dr Chalmers — keen to frame the RBA’s decision in an economic, not political lens — assured Australians the Government was still working on delivering more cost-of-living relief in the lead-up to the election.

“We know that people are still under pressure, and that’s why the primary focus of this Albanese Labor government will continue to be the cost of living,” he said.

“It was before this decision, and it will be after this decision as well.”

Australians will head to the polls in the next three months, with rampant speculation a rate cut would mean that happens sooner rather than later.

Cabinet’s powerful expenditure review committee met for hours over Monday and Tuesday ahead of a March 25 budget. Whether that goes ahead or not is a decision of the Prime Minister, who on Tuesday afternoon shrugged off suggestions he’d go to early.

“No, this won’t have an impact on the timing of the election,” Anthony Albanese told ABC Radio Brisbane.

“We’ve been really working hard. We’ve been working hard, and we’ve been... working on the budget, and the expenditure review committee met for many, many hours yesterday and again this morning.”

Households on the front line

Ms Bullock acknowledged the pain facing households, suggesting that the “restrictive” rates felt by mortgage holders had been a significant dampener of demand, which had played a major role in getting inflation down.

“Households are paying record historical amounts on their mortgages in terms of payments required as a share of their income,” she said.

“I understand that you are hurting and I understand that mortgage rates have increased a lot and you’re finding that hitting your disposal income,” she said.

“But we need to get inflation down, because that’s the other thing that’s really hurting you.

“If we don’t get inflation down, interest rates won’t come down, and you’ll be stuck with inflation and high interest rates.

Asked whether the Government should “claim the credit” for getting inflation down, Ms Bullock suggested supply chains opening up and interest rates had been material but did agree policy had been helpful.

“I think we are succeeding in the mix of policies that we have got to bring inflation back down at the same time as we’re maintaining employment. So I think that’s actually a really positive outcome. It’s two arms of policy independent, but they’re each doing their own thing,” she said.

Business welcomes cuts

Industry groups also welcomed the cut, but called on the Government to work on reducing regulation, and cutting spending to ensure inflation remains contained.

Australian Chamber of Commerce chief executive Andrew McKellar said the cut would be a welcome relief for businesses, especially small business owners who had endured years of high costs.

“We are looking at this decision as a valuable circuit breaker to boost consumer confidence and business sentiment,” Mr McKellar said.

Business Council of Australia CEO Bran Black said that while the cut was welcome, more work was needed to bring down government spending and red tape.

“If we want to supercharge our economy then we need to look at how our regulatory settings are putting the handbrake on much needed investment, Mr Black said.”

“Australia must become a more competitive place in which to do business if we want to be a leading economy of the future.”

CBA’s head of business banking Mike Vacy-Lyle said the cuts would also flow through to their customers.

“Businesses are the lifeblood of Australia’s economy, and they’ve shown remarkable resilience in what has been a challenging environment,” Mr Vacy-Lyle.

Investors were taken aback by the hawkish tone of the RBA minutes, which saw a sharp selloff in the S&P500 on the announcement before trending down to end the day 0.7 per cent lower.

“The initial reaction for stocks has been negative, mostly due to the central bank’s explicitly “cautious” approach to future cuts,” Capital.com senior financial analyst Kyle Rodda said.

The Australian dollar briefly spiked on expectations that fewer rate cuts would be supportive of the currency and seesawed over the course of the afternoon to end up slightly higher against the US dollar.