Don’t count on rates to fall next year

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While the Reserve Bank of Australia (RBA) gave mortgage holders a Christmas gift by leaving official interest rates on hold this month, what it does over the course of the next year is harder to read.

Federal Treasurer Jim Chalmers and new RBA Governor Michele Bullock and her Board have agreed to significant changes to the government’s expectations about the way the bank works.

The RBA will be operating differently next year, with fewer Board meetings and more transparency about how it comes to its decisions on interest rates.

One change announced this month is the RBA has altered its inflation target of from 2-3 per cent to a more specific 2.5 per cent. This is an inflation rate Australia has not enjoyed since March 2013, and could mean the RBA will keep interest rates higher for longer.

Inflation began rising rapidly in 2021 and the RBA has lifted interest rates 13 times since May last year to bring down inflation, which peaked at about eight per cent at the end of last year.

The latest monthly measure of inflation showed it falling to 4.9 per cent in October, and the RBA expects inflation to have fallen to just under three per cent by the end of next year.

AMP Chief Economist Shane Oliver said the change could be interpreted two ways.

“In theory, this shift … could have the effect of making them more hawkish: making them raise rates again or making them less inclined to cut rates, or take longer when they do,” he said, but added that directive was softened by the looser timeframe.

HSBC Chief Economist Paul Bloxham said the fact there’s no timeframe in which the RBA must return inflation to target means the statement shouldn’t change the path of interest rates.

“I’m not sure that has made that much difference to the way they’re going to operate,” he said.

“It really does leave them with a high degree of flexibility.”

My conclusion from all of this is do not assume rates will come down next year, and be prepared for any further rises.

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