The RBA kept rates on hold in September 2023. Here's what that means

Mortgage holders breathed a sigh of relief today as the RBA announced it would keep the cash rate on hold at 4.10%. It’s the third successive decision to hold rates after an extraordinary year where the cash rate has jumped by 4% since May 2022. It also maintained the interest rate paid on Exchange Settlement balances at 4.00%.

While there was some speculation that Lowe could finish his term with a final increase to ease incoming governor Michelle Bullock into her term and save her from another hike later in the year, the truth is, he has finished quietly and as anticipated by many in the market. You can read more about Lowe’s term in the RBA in this article by my colleague Hans Lee.

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Here’s the rationale for the RBA decision

In the Board's statement to the market, it cited the following reasons for maintaining the cash rate at 4.10%:

• Inflation has passed its peak and the monthly CPI indicator from the ABS for July showed a decline. Services inflation is still rising though and rent inflation is elevated.
• Household consumption growth is weak, as is dwelling investment.
• The Australian economy is experiencing below-trend growth.

The Board also, as expected, said it would (and could) not rule out further rate rises down the track. After all, inflation is not at the RBA’s target range of 2-3% and there is still persistent services inflation internationally.

Some interesting things to note…

• The RBA dropped its initial forecast for CPI inflation to decline to around 3.25% by the end of 2024 from its initial statement but is still predicting inflation to return to the target range of 2-3% in late 2025.
• The RBA also referenced uncertainty around the Chinese economy in its statement. This has not been a standard inclusion in recent statements.

There are a range of challenges for inflation on the horizon. One of which is the coming El Nino weather pattern, which can affect the agricultural sector and mean rising grocery prices as a result of shortages, among other implications.

The challenges for China are also considerable. 

The Australian economy is strongly dependent on activity in China, particularly in the resources sector but our property sector is also not immune. The Chinese property market is facing a range of difficulties, with Evergrande having recently filed for bankruptcy protection and Country Gardens facing a risk of default (though it struck a debt deal yesterday). There are fears the challenges for Chinese developers could extend to problems here, with a subsidiary of Country Garden developing two massive housing estates in Sydney and Melbourne for example. 

According to Bloomberg, of China’s 50 private-sector developers, 34 have already suffered delinquencies on offshore debt so it’s fair to say, there is more uncertainty coming.

What is next?

Lowe made it clear the RBA Board would not rule out further rate rises down the track. After all, inflation is not at the RBA’s target range of 2-3% and there is still persistent services inflation internationally. Some economists expect one more hike by the end of 2023, while others believe we are done. 

If we've learned anything from past RBA statements (no rate rises until 2024, anyone?), it's to expect the unexpected. You cannot always predict macro events. But for this month at least, cash rates remain unchanged.