Steady rates and easing inflation should provide boost to consumer sentiment

Commentary by CoreLogic Research Director, Tim Lawless

The RBA’s decision to hold the cash rate at 4.1% will be considered a welcome reprieve for many, but it doesn’t necessarily signal an end to the rate hiking cycle. Considering the RBA is working with a mixed bag of key data sets that guide their decision-making, another rate hike down the track remains a possibility.

On one hand, we have a lower-than-expected inflation outcome for the June quarter supporting the hold decision, with headline inflation lower than RBA forecasts at 0.8%, the lowest quarterly change since Q3 2021. Retail sales posted a broad-based decline in June, down 0.8%, and economic conditions weakened with GDP growth of just 0.2% in Q1. Regarding the housing market, the RBA previously expressed concerns about asset value growth, but those worries may have diminished as we’ve seen price growth decelerate in the past two months.

On the flipside, we have persistently tight labour market conditions, with unemployment at just 3.5% alongside strong jobs growth, low productivity growth, and wages that are rising well above the decade average. Although inflation is coming down, services inflation is ‘sticky’, with annual growth tracking at the highest annual level of growth since 2001.

Although rates remained on hold this month, it’s not to say there won’t be another hike down the track. We will see more detail on the RBA’s economic perspectives when the quarterly Statement on Monetary Policy is published on Friday, but considering the aforementioned opposing trends, another rate hike can’t be dismissed.

Highlighting the uncertainty ahead, some economists have already called a peak in the rate hiking cycle, others believe there will be one more hike in the coming months, while others are pricing in two more rate hikes on the basis of tight labour market conditions potentially feeding wages growth and keeping inflation higher for longer. The range of cash rate forecasts reflects the sheer uncertainty in the economy.

The RBA itself has once again left the door open for rate hikes, noting some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but this depends on the trajectory of inflation and labour market outcomes.

For the housing sector, the decision to hold interest rates over the past two months is positive news. A growing expectation that interest rates have peaked, or are near a peak, should help to lift consumer sentiment from the recession-like lows that have persisted over the past nine months.

Consumer confidence and housing activity go hand in hand. Generally, when sentiment is low, home sales are low and vice versa; so, any lift in sentiment is likely to be accompanied by a rise in active buyers and sellers.

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