Interest rates on hold as RBA eyes inflation cooldown

The Reserve Bank of Australia (RBA) has kept interest rates on hold despite economic data showing that inflation is decreasing faster than expected.

As part of an historic first decision under the RBA's new interest rate schedule, the central bank decided to keep the cash rate target on hold at 4.35 per cent.

The decision comes despite surprising figures from the Australian Bureau of Statistics (ABS) that inflation is cooler fast than anticipated, with headline figures now sitting at a two-year-low.

In her monetary statement, RBA Governor Michele Bullock softened her guidance on the nation's monetary policy, but stopped short of suggesting that rate cuts were imminent.

"While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range," she said.

"The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.

"The Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.

"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."

Graham Cooke, head of consumer research at Finder, said today's decision will likely be met with relief from thousands of households struggling with the cost of living.

"Households have been struggling immensely according to our data, so this rate hold will come as welcome news," he said.

"We're now starting to see a few banks ease rates on some of their fixed rate home loans in anticipation of rate cuts to come – the attitude has certainly shifted.

"If your rate doesn't start with a 5, it may be time to consider your refinancing options."

Since April 2022 - when interest rates were just 0.10 per cent - the average Australian mortgage has seen annual repayments increase by $16,788.

Anneke Thompson, Chief Economist at CreditorWatch, said the possibility of a rate cut was still in play for the middle of the year.

"At 4.1 per cent, the December inflation figure is still too high for the board to consider a rate cut today, however, all indicators point to inflation falling faster than last year's forecasts, and this may well result in a decrease to the cash rate some time in the middle of the year, rather than the latter half," Thompson said.

"Inflation is also falling rapidly in major overseas economies, and central banks in the USA, UK and Europe are likely to consider cuts to their interest rates over the next few months.

"Should the unemployment rate start increasing at a more rapid pace, the RBA board may choose to cut the cash rate sooner rather than later, as preserving the employment gains achieved since the pandemic is one of their key goals."

The December-quarter consumer price index revealed inflation 4.1 per cent, its lowest in two years and under the RBA's November forecast.

But overnight, the Organisation for Economic Co-operation and Development (OECD) warned the RBA and other central banks against cutting official interest rates too quickly.

While the inflation outlook had improved, the economic think tank warned monetary policy needed to stay tight to keep prices under control.

"Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained," it said.

"Scope exists to lower policy interest rates as inflation declines, but the policy stance should remain restrictive in most major economies for some time."