Rates on hold

Nerida Conisbee
Ray White Group
Chief Economist

A distinct change to the interest rate outlook occurred at the end of last year. In early December there was a view that we were in for at least one more rate rise. In mid December however, a sharp drop in US inflation, followed by the suggestion by the US Federal Reserve that rates could be cut three times in 2024 led to a change in sentiment in Australia. By the end of December, markets were pricing in two rate cuts for Australia in 2024.

A further driver of downward pressure on rates is December inflation which came in at four per cent for the year, a significant decline from the September quarter result of 5.4 per cent. The quarterly decline was the lowest it has been since March 2021.

The big difference between Australia and the US however is the state of the rental market. Australian rental increases have settled down a bit but there remains a shortage of rental properties. High construction costs are preventing more properties being built and high interest rates is leading to relatively lacklustre investor activity. These rental increases are feeding into Australian inflation, further contributing to the lack of rental properties. In the US, construction activity is strong and there is a surplus of rental properties.

More positively for Australian rental increases is that there have been some major changes to rent assistance and in the December quarter inflation numbers, rental increases were significantly reduced compared to where they would otherwise have been. 

For mortgage holders, today’s announcement will be welcome but still does not provide much relief. A decline in rates, the first of which is expected sometime in the first half of the year, can’t come soon enough.