The Reserve Bank of Australia (RBA) surprised many by keeping the cash rate unchanged at 4.35% during its May 2024 meeting. While some economists had anticipated another rate hike, the RBA maintained its stance, signalling that further tightening could not be ruled out if needed to bring stubbornly high inflation back within the 2-3% target range over a reasonable timeframe.
Inflation in Australia remained elevated around 7% in the early months of 2024, driven by persistent domestic services cost pressures despite some easing in global supply chain constraints. RBA Governor Michele Bullock acknowledged that while overall inflation may have peaked, the process of moderation is proving lengthier than initially projected.
Opinions among economists diverged regarding the trajectory of future rate adjustments. Some forecasted up to three additional 25 basis point hikes throughout 2024, contending that Australia’s cash rate remains subpar relative to its peers. Conversely, others anticipated a commencement of rate reductions later in the year, albeit acknowledging heightened risks associated with prolonged inflationary pressures.
The RBA’s decision caught markets off guard, as prevailing sentiments had priced in a heightened probability of a May rate increase following recent hawkish rhetoric from the central bank. Subsequently, bond markets increasingly reflected anticipations of further monetary tightening in 2024, diverging from earlier projections of rate cuts.
Major Australian banks have also weighed in on the RBA’s decision and the broader economic outlook. Commonwealth Bank of Australia (CBA) economists expected the RBA to raise rates by 25 basis points in May, citing the need to address persistent inflation pressures. However, they now anticipate the RBA to pause until August before delivering two more hikes, taking the cash rate to 4.85% by the end of 2024.
National Australia Bank (NAB) economists shared a similar view, forecasting two more rate hikes in 2024, with the cash rate peaking at 4.85%. They noted that while the RBA’s decision to hold rates in May was a surprise, the central bank’s hawkish language suggests further tightening is likely.
Westpac economists, on the other hand, believe the RBA may have already done enough to bring inflation under control, with the cash rate potentially peaking at the current level of 4.35%. They cited the lagged effects of previous rate hikes and the potential for a more significant economic slowdown as reasons for the RBA to pause its tightening cycle.
ANZ economists struck a more hawkish tone, predicting three more rate hikes in 2024, taking the cash rate to 5.1%. They argued that the RBA’s commitment to returning inflation to target within a reasonable timeframe necessitates further policy tightening, despite the risks of a deeper economic downturn.
While the national housing market has cooled somewhat from its pandemic peak, conditions in Brisbane have defied the broader downturn. According to CoreLogic data, Brisbane’s median dwelling value surged to $834,000 in May 2024, marking a remarkable 16.3% increase compared to the corresponding period the previous year, surpassing national averages significantly.
The principal impetus behind this surge lies in a pronounced supply-demand disparity, with total listings in Brisbane declining by 9.2% year-on-year, notwithstanding a 20.2% surge in new listings during the same period. This scarcity has engendered fierce competition among prospective buyers, propelling sales volumes upward by 7% while compressing the median days on the market to a mere 19 days.
Furthermore, Brisbane’s rental market has undergone substantial tightening, with vacancy rates contracting from 1.2% in December 2023 to 0.9% in February 2024, as reported by SQM Research. House rents have escalated by 7.6% over the preceding year, while unit rents witnessed a surge of 11.2%.
Anticipated interstate migration to Queensland in anticipation of the 2032 Brisbane Olympics is poised to sustain robust housing demand in the city. Most experts concur that Brisbane’s property market is likely to sustain its upward trajectory in the immediate future, buoyed by robust economic fundamentals and constrained housing supply.
However, at the national level, economic expansion is moderating amid augmented interest rates and heightened cost-of-living pressures. This deceleration, coupled with tentative indications of a cooling labour market, will inform the RBA’s calibration of monetary policy to mitigate inflationary pressures without precipitating an overly severe economic downturn.
The RBA’s hawkish stance contrasts with the approach taken by many other major central banks around the world. While the likes of the Federal Reserve, Bank of England, and European Central Bank have hit the pause button on their rate hiking cycles, the RBA is keeping the door wide open for more tightening down the road.
So what will determine if those additional hikes actually materialize? The RBA will be closely watching the incoming economic data over the coming months. Inflation trends, employment figures, consumer spending patterns – all of these will be crucial signposts guiding the RBA’s next policy moves. If price pressures remain stubbornly high or the economy shows surprising resilience, don’t be surprised to see another rate increase or two before year-end.
Sources:
PropTrack Home Price Index – May 2024
RBA May 2024 Monetary Policy Statement
RBA Board Meeting Minutes – May 7, 2024
Various bank economist forecasts (CBA, NAB, Westpac, ANZ)
