Home owners have been given a reprieve from further mortgage pain with a second hold on the cash rate, but the Reserve Bank of Australia has not ruled out futures raises if inflation remains high.
The RBA's decision to keep the cash rate at 4.35 per cent at its August meeting was widely predicted by financial experts, including those at all four of the major banks, after last month's inflation figures came in lower than expected.
The consumer price index (CPI) was 3.8 per cent in June, above the RBA's target of between 2 and 3 per cent, but significantly lower than had been predicted.
However, governor Michele Bullock has reiterated the RBA's position that future hikes would remain on the table as long as inflation remained above target.
"The board is determined to ensure that expectation of higher inflation do not become embedded in price and wage setting decisions," Ms Bullock said at a press conference after the decision was announced.
Ms Bullock said the RBA predicted inflation would remain above target until late 2027, but a number of economic factors, including falling house prices and a softening labour market could indicate the three hikes to the cash rate in the first half of the year had been effective in restricting growth in the economy.
"The board therefore decided to leave the cash rate target unchanged at this meeting to allow more time to assess whether the economy is evolving as expected," Ms Bullock said.
"The message today is that in waiting, the board isn't ruling out that there might be a need for further interest rate rises if we look like we're off a path which takes us with inflation remaining above the target for much longer than in the forecasts.
"We're not ruling that out, but we're saying we want to get a bit more information to confirm whether or not we still seem to be on that path."
The decision was unanimous among board members, who did not consider a cut to the interest rate, Ms Bullock confirmed.
Associate professor of economics at the University of NSW Evgenia Dechter said the easing in the economy presented an opportunity for the RBA to wait and see before committing to more changes to the cash rate.
"Inflation is still too high, but the economy is showing signs of a slowdown, including weak GDP growth, upward trend in unemployment rate, and increasing underemployment," Ms Dechter said.
"The RBA can afford to wait for more evidence rather than risk weakening the economy and labour market more than necessary."
The rate was also held in June, after being raised in February, March and May, following more than a year of holds or decreases.
Housing is one of the major drivers of inflation in the Australian economy, but thanks to high interest rates, low consumer confidence and major tax reforms introduced as part of the federal budget, the property market has been declining in recent months.
According to Cotality, home values fell 0.7 per cent in July, the largest drop since December 2022. Home values went down in Sydney, Melbourne, Brisbane, Adelaide and Canberra in July, while there were very slight rises in Perth and Hobart.
Homes in the regions also dropped for the first time since January 2023, decreasing 0.2 per cent in July.
LJ Hooker head of research Mathew Tiller said the hold would provide some reassurance for those looking to buy, but would not be a quick-fix for affordability.
"Buyers are likely to be cautious because borrowing capacity remains tight while sellers may feel more comfortable coming to the market but will need to be realistic on price," he said.
However, he said a softer market was not necessarily a bad time to sell.
"People continue to buy property every day because life continues to move as families grow, jobs change, or they may need to downsize or retire," he said.
"It is possible that some people are looking to sell now and potentially buy for less towards the end of the year, but it is a risky strategy because markets are moving differently by suburb, price point and dwelling type."
The RBA has a dual mandate: to keep inflation low and employment high.
It does this by controlling the cash rate, which is the interest rate that banks pay to borrow from one another in overnight borrowing. This then affects the rate of interest that banks charge homeowners on their mortgages.
When inflation is above the target of between 2 and 3 per cent, the RBA can raise the cash rate, which increases pressure on households, forcing less spending in other areas. This, in turn, reduces demand in the economy and reduces inflation.
