Rates on hold as mortgage-belt spared

Relief for the mortgage belt as The Reserve Bank of Australia (RBA) has kept interest rates on hold, writes The Motley Fool.

It was likely a close-run decision, but in the end, the RBA did what most people expected them to do, keeping interest rates on hold at 4.75%.

You can feel the large sigh of relief from mortgage-holders across the country. Already faced with rising energy and grocery prices, the last thing they needed was higher mortgage repayments. Phew.

But the relief may be short-lived. Inflation is running at the top end of the RBA’s 2% to 3% inflation target. In fact, data published this week by the TD Securities-Melbourne Institute pointed to annual inflation running at 3.2% in July.

Spared for how long?

If inflation does stay at these elevated levels, the RBA will have no choice but to increase interest rates. We may have been spared this month, but perhaps not for too much longer.

Here at The Motley Fool, we have a bias towards the RBA leaving interest rates on hold for an extended period.

And, we wouldn’t even be surprised if the next move was down, not up.

Falling house prices to save the day

RP Data-Rismark recently said home prices had fallen 2% in the year to June. Compounding the woes, the Housing Industry Association (HIA) said new home sales posted their biggest monthly drop in five years in June, sinking 8.7%.

It doesn’t paint a pretty picture.

House-prices, and the share market, have a huge ‘wealth effect’ on the population.

It’s no coincidence that in the run-up to the GFC, when house prices and the share market were booming, so too was our economy. Back then, in the good old days, our economy could handle a cash rate of 7.25%.

Remember that? How quickly we forget.

Today, the mortgage belt would scream blue-murder if the cash rate was above 5%, let alone above 7%.

Three letters explain the problem – GFC.

Weak at the knees

As for the share market, along with house prices, it keeps edging lower, and lower, and lower, and lower.

Year to date (YTD), it’s off 6.5%, making the fall in house prices look like a picnic by comparison.

Look away now if the sight of red numbers makes you squeamish …

Company Share Price Change YTD
BHP Billiton (ASX: BHP) -8.5%
ANZ (ASX: ANZ) -10.8%
Woodside Petroleum (ASX: WPL) -9.9%
CSL Limited (ASX: CSL) -15.4%
Suncorp Group (ASX: SUN) -14.1%
Qantas Airways (ASX: QAN) -27.4%
Toll Holdings (ASX: TOL) -20.9%
Caltex Australia (ASX: CTX) -25.8%

Source: Capital IQ, a division of Standard & Poors

Those are pretty significant falls for some of Australia’s largest and most popular companies.

In the face of these headwinds, despite the inflation data saying otherwise, how could the RBA raise interest rates?

No free lunches

Can you see where we’re coming from when we say we have a bias towards interest rates remaining on hold, or even cut?

Struggling working families will welcome lower interest rates.

But there is a cost. Lower rates come with higher unemployment and a generally slower economy.

The best we can hope for is the status quo. Australia hasn’t had a recession for 20 years. We’re not in one now, but to some it must feel like it.

Like it or not, we’ve just got to tough it out. There ‘aint no free lunches here. They all ran out in September 2008 when the GFC hit.

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Of the companies mentioned, Bruce Jackson has a beneficial interest in ANZ and BHP. The Motley Fool’s disclosure policy is doing it easy.

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