After months of relentless interest rate hikes, inflation is showing signs of moderating and household spending is slowing down. Does this suggest that the RBA is done raising the official cash rate?

It does, according to leading economists. This offers some positive news to mortgage holders. “Total spending is weakening, so that means the RBA rate hikes are working,” says Commonwealth Bank Chief Economist Stephen Halmarick in a report.

The latest data from the Australian Bureau of Statistics (ABS) shows annual consumer price increases eased from 5.4% in June to 4.9% in July. Household spending in July was also the slowest growth rate since February 2021 at only 1.8%.

In particular, “Spending on discretionary goods and services was down for the third straight month, falling 0.7% over the year, as households adjust to cost of living pressures,” according to ABS Head of Business Indicators Ben Dorber.

“Non-discretionary spending rose 4.2%. However, the growth rate has been slowing since January, when it reached 21.0%.”

Figure 1: Australia’s annual Consumer Price Index movement, July 2023

Source: Monthly Consumer Price Index Indicator, July 2023


Rate cuts coming in 2024

As consumer spending declines, economists expect the RBA to start trimming interest rates in 2024. AMP Capital Chief Economist Shane Oliver forecasts the first cut to come as early as March.

“If, as we expect, the economy continues to weaken as past rate hikes increasingly bite, this will maintain downwards pressure on inflation, heading off any further rate hikes and ultimately allowing the RBA to cut rates next year,” says Oliver.

“We’re allowing for the first rate cut in the March quarter next year, albeit the risk is that this may be delayed if productivity remains poor, services inflation is sticky and if home prices continue to surge.”

Independent economist Chris Richardson doesn’t anticipate rate reductions until at least the end of 2024, mainly because of the implementation of Stage 3 tax cuts in July 2024. This economic stimulus could boost consumer spending and contribute to inflation.

“We’re 12 months and maybe more away [from rate cuts],” says Richardson in a report.


Housing market remains resilient

In the meantime, housing prices are expected to continue rebounding, driven by a construction shortfall and increased migration.

Halmarick predicts that house prices will rise by 7% this year and by another 5% in 2024. He says that “by about this time next year, we’ll be back at all-time record highs for house prices in Australia.”

According to CoreLogic’s latest data, national housing values rose by 0.8% in August, hitting $10 trillion. That marks the sixth consecutive monthly increase and was higher than the 0.7% rise recorded in July.

As CoreLogic’s Eliza Owen points out, “The recovery trend in values comes despite a cost of living crisis, low consumer sentiment levels and four increases in the cash rate so far this year amid the fastest rate-hiking cycle on record. It begs the question, how is this possible?”

Owen, CoreLogic’s Head of Residential Research Australia, attributes the trend to net overseas migration, limited housing supply and buyers using their savings or equity from previous homes to purchase property, instead of taking on more debt.

However, she notes that the recovery might not be sustainable as the housing market outlook remains uncertain. “While there is a growing expectation that the RBA board is done hiking the cash rate, borrowing remains constrained by a relatively high serviceability buffer.”

Australia’s economic performance could also soften, she adds. “CoreLogic is expecting some heat could come out of the recent recovery trend towards the end of this year, while a more robust recovery in housing values will be limited until credit conditions loosen.”

Back to Insights and News

Related articles

All insights

Borrowers feel the heat of high rates

With interest rates staying elevated following a year of aggressive increases, mortgage stress is on the rise among borrowers. New data from Roy Morgan reveals that the number of Australians facing mortgage stress has increased by 724,000 since May 2022, when the Reserve Bank of Australia (RBA) began raising the cash rate from a record…
Read More

Housing market soars 40% four years after pandemic

The impact of the pandemic continues to shape Australia’s property market, four years on. Dwelling prices have exploded as factors such as population growth and limited supply drive competition for homes. According to data from PropTrack, national home values surged by 39.9% from March 2020 to March this year. Prices in regional areas soared by…
Read More

Australian SMEs grapple with rising defaults amid cost pressures

The rising cost of borrowing and reduced consumer demand are hitting small and medium-sized enterprises (SMEs) hard. Payment defaults among them have surged to a record high, making them more vulnerable to business failure. According to the latest CreditorWatch Business Risk Index (BRI), business-to-business trade payment defaults are now above pre-COVID levels and rose by…
Read More