Rates on hold as RBA grows wary about inflation pressures

The Reserve Bank did not play Christmas grinch with an interest rate rise at its final meeting of the year, but millions of borrowers could be stung by high mortgage repayments as early as February after the bank revealed it is “alert” to inflation pressures across the economy.

Bank governor Michele Bullock on Tuesday declared that additional interest rate cuts were not needed for an economy that apart from an uptick in inflation was now making the shift from government life support to growth out of the private sector.

“I don’t think there are interest rate cuts in the horizon for the foreseeable future,” Bullock said after confirming the cash rate would finish the year steady at 3.6 per cent.

“The question is it just an extended hold from here or is [there the] possibility of a rate rise? I couldn’t put a probability on those, but I think they’re the two things that the board will be looking closely at coming into the new year.”

The bank’s monetary policy committee, she revealed, did not consider an explicit rate rise at its meeting but it did discuss the circumstances necessary for such a move.

Inflation risks are “tilted to the upside” although electricity subsidies continue to get a true handle of the price pressures in the economy. The biggest threats continue to come out of the services sector and building construction.

The bank has sought to delineate what may be temporary inflation and what is persistent. But Bullock conceded telling the difference between the two was difficult.

“It is very uncertain what is temporary and what is persistent,” she said.

That difficulty was reflected in an original statement by the bank announcing its hold decision. The ASX200 lifted and the Australian dollar fell against the US dollar after investors expressed a sense of relief that the bank was not about to aggressively lift rates.

IG market analyst Tony Sycamore said the statement was not the “the statement of a central bank with one hand hovering over the rate hike button”.

But as the same investors read the statement more clearly, and then listened to Bullock, they changed their tune. The ASX200 slipped 0.4 per cent from its post-statement high and the dollar lifted to a 3-month high.

NAB chief economist Sally Auld said the bank had little room to move given the economy was recovering and inflation was higher than expected.

“Our sense is that it won’t take much for the RBA to respond to evidence of a more persistent inflation trajectory,” she said.

Capital Economics’ Marcel Thieliant believes not only will the Reserve lift rates at its February meeting but it will follow them up with another by the middle of next year.

That would push the cash rate back to 4.1 per cent - where it was at the start of 2025.

Much hinges on the December quarter inflation figures due out in late January. Anything above 0.8 per cent in underlying inflation for the quarter will force the Reserve Bank to move.

Treasurer Jim Chalmers said while borrowers would be disappointed the bank had not cut interest rates further, the three cuts of 2025 had saved a household with a $700,000 mortgage about $330 a month.

After being attacked by his political opponents over the economy’s dependence on government spending over the past three years, he pointed to the Reserve’s commentary about the private sector.

“The private sector has resumed its rightful place as the key driver of growth, powered by the strongest growth in private investment in almost five years,” he said.

One of those political opponents, shadow treasurer Ted O’Brien, said government spending had contributed to the Reserve’s predicament.

“That inflation has re-emerged and the RBA is poised to raise rates from their already high level while the household economy is at a standstill should be a blaring siren for the Albanese government,” he noted.

Adding to the Reserve’s troubles reading the country’s inflation pressures has been federal and state government electricity subsidies (which have now come to an end).

KPMG chief economist Brendan Rynne released research showing that if the subsidies were taken out of the consumer price index, headline inflation right now would be 3.2 per cent rather than 3.8 per cent.

He said the focus would now turn to budget settings and whether the private sector continues to strengthen.

“A lot will depend on how fiscal policy plays out over the coming months and whether the transition of demand away from public sector to the private sector continues,” he said.

That puts some of the onus back on Chalmers who next week will release the mid-year budget update which, he said on Tuesday, would contain more savings.

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