Forget the headlines about rates relief, read between the lines there’s more misery ahead

It’s been billed as a relief but the Reserve Bank’s latest interest rates hold doesn’t do anything for mortgage holders now and comes with a sting in the tail: repeated threats of more pain to come.

Australians breathed a small sigh of relief when RBA chairwoman Michele Bullock confirmed her Monetary Policy Board had voted unanimously to leave the cash rate at 4.35 per cent on Tuesday.

But any other result would have been a massive surprise, leaving analysts to dig deeper to find out what the decision, and the mountains of data the board released along with it, meant for the average Australian.

First, the good news from the central bank’s Statement on Monetary Policy: its quarterly set of forecasts and overview of the economy.

It thinks inflation has peaked, predicting the Consumer Price Index will ease from 3.8 per cent now to 3.6 per cent by the end of the year as its preferred trimmed mean falls from 3.6 per cent to 3.3 per cent.

Those predictions are lower than when the bank last met, pointing to previous rate cuts working faster than expected to slow price rises. 

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The bad news is that the RBA doesn’t believe inflation – both headline and underlying – will hit the mid-point of its 2 per cent to 3 per cent target until June 2028, almost two years away.

That dramatically undercuts the possibility of a rate cut any time soon, and indeed, the banks own modelling assumptions put the cash rate at 4.4 and 4.5 per cent into 2027 and 2028.

“Homeowners might be breathing a sigh of relief that rates haven’t gone up again today, but there’s not much to celebrate,” Zyft consumer finance expert Joel Gibson said.

“Rates remain at their equal-highest level since 2011, and after three rises already this year, households are still feeling the squeeze.

“Someone with a $600,000 mortgage is paying around $272 more a month – or $3265 over the next year – and the Big Four banks aren’t expecting meaningful relief until 2027.”

Oxford Economics head of economic research and global trade Harry Murphy Cruise said the board’s statement was “about as hawkish as it could be without actually pulling the rate-hike trigger”, warning the inflation threat remained “very real”.

“The board’s hawkish language is partly designed to temper expectations among households and businesses,” he said.

“One reason inflation picked up at the back end of last year was that households and firms increasingly behaved as though the fight against inflation had been won, exacerbating capacity constraints after years of meek productivity growth.

“The board is working hard to make sure that doesn’t happen again. Keeping the prospect of another rate hike alive is one way of discouraging demand from getting ahead of itself.

Bullock was quick to confirm that while the board discussed the possibility of hiking rates again, the possibility of cutting them this time around wasn’t considered.

But the banks did point to some green shoots of hope among the bank’s words.

Westpac Group chief economist Luci Ellis said this was a “hold of a different character to June’s meeting”, when the central bank was in “wait and see” mode.

“The RBA has evidently concluded that the base case is that rates are on hold,” Ellis said.

“Headline and trimmed mean inflation have both come in lower than the RBA expected in May, and the labour market and housing market are both weaker than it expected.”

NAB chief economist Sally Auld and the bank’s head of Australian economics, Gareth Spence, said there were “signs that the economy is adjusting as required”, highlighting small changes of wording from the bank between June and this week.

“One read through of this shift might be that the board believes no further slowing is required, just a steady quarterly run-rate of GDP growth around 0.3-0.4 per cent through to mid-27,” they said.

Even so, they described the bank’s outlook as “relatively even-handed”, predicting rates would stay on hold for 2026 but it was “likely to be sometime” before the RBA was more comfortable with inflation.

Bullock threatens another hike

There were also a few indications straight from the bank about what to expect, critically, the board stressed “inflation is still too high”.

“We’ve already acted three times, and we will go again if we need to,” Bullock said.

“And I think personally that it’s quite possible we might need to go, but we’ll wait and see what the data tell us.”

She remains laser-focused on the risks that could push inflation higher than expected, not least of which is the unpredictable conflict in the Middle East.

“I understand this is a difficult period for some households,” she said.

“High inflation hurts all Australians, especially the most vulnerable, and that is why bringing inflation down is our priority.”

The property elephant

The rates announcement came just hours after ANZ became the latest big four bank to predict a major housing correction, forecasting that property prices could drop by up to 15 per cent in some markets over 2026 and 2027.

The board admitted the market had called more than it expected, pointing to housing prices nationally declining by 1.6 per cent from their peak in March and falling auction clearance rates, along with plummeting demand for new housing loans.

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Bullock couldn’t say whether the slowdown was due to three interest rate hikes earlier this year or the government’s changes to negative gearing and the capital gains tax discount.

“It’s very hard to tell,” she said.

“The other thing, of course, is I think just general uncertainty earlier in the year from the whole conflict in the Middle East and the petrol prices and all those sorts of things, that all added to people being a little bit nervous about it.

“So there’s a number of factors. I wouldn’t like to attribute a particular percentage to any.

“All I can say though is that historically, when interest rates rise, yes, you would typically see some sort of slowing in the housing market.” 

The impact of AI

The board spent quite a lot of its Statement on Monetary Policy highlighting a stronger-than-expected boom in artificial intelligence and data centre investment.

It went so far as to say that the very strong business investment growth in the march quarter was “largely” driven by data centre investment.

Curiously, the SMP highlighted the inflationary risks posed by the AI boom pressuring construction capacity at home and semiconductor-related inflation globally, despite not factoring in any positive productivity spillover from the resulting investment,” Ellis noted. 

While productivity benefits would be expected to come through with a lag, how long this was expected to take was not addressed.

 We also find it curious that the SMP and Governor highlighted the contention for construction labour and other resources this involves, but the effects of this are only barely evident in its GDP forecasts. This implies a view that data centre construction must be crowding out other construction.