Investors breathe sigh of relief as RBA holds

Today's decision by the Reserve Bank to hold the cash rate steady at 4.10% will no doubt come as a relief to borrowers and property investors struggling with the rising cost of living.

As at 3 July, the ASX 30 Day Interbank Cash Rate Futures indicated an 84% expectation of an interest rate hold today.

In a statement, Reserve Bank governor Philip Lowe said the board decided to pause this month to allow previous rate hikes to take effect.

"The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so," he said.

"In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month.

"This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."

Mr Lowe didn't rule out the possibility of further rate hikes.

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

Forecasters were divided on whether the RBA would hike rates this month, but almost all were in agreement that rates needed to go higher to rein in inflation.

The official quarterly measure of inflation peaked at 7.8% in the year to December and currently sits at 7%. The current monthly measure is 5.6%.

CommBank economists correctly predicted the RBA would hold the cash rate this month. NAB, ANZ and Westpac economists all tipped a 0.25 basis point hike in July, but said a delay until August would also not be a surprise.

PropTrack Senior Economist Paul Ryan said despite today's decision to hold, the RBA signaled more tightening may be needed to rein in inflation, with another hike expected in August.

"The RBA judged that recent data on the labour market and inflation was in line with its expectations, and opted to wait for additional data on inflationary pressures and productivity growth, in particular," he said.

"More tightening is expected to be needed to bring inflation back to the RBA's target, but rate are close to their peak, which is good news for the housing market." 

So far, the property market has remained relatively resilient to increasing interest rates. Property prices increased further in June according to CoreLogic's national Home Value Index released on Sunday, with national home values increasing 1.1% over the month.

"Offsetting higher mortgage rates, strong buyer demand has been focused on a slower flow of new property listings and led to price increases," Mr Ryan said.

"Forward indicators point to further home price growth in the months ahead. But continued higher interest rates remain a risk for the housing market.

"At some point, eroded borrowing capacities and weaker economic conditions brought about by higher interest rates may lead to price falls, as seen in 2022."

More to come...

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