Inflation is slowing, so why is the RBA holding the cash rate?

The RBA has kicked off 2024's cash rate announcements with a hold at 4.35%, as borrowers question when rates will start dropping

With the latest figures showing the rate of inflation slowing, borrowers are waiting for interest rates to fall. But they'll have to wait a little longer after the Reserve Bank of Australia (RBA) today announced its February decision to hold the cash rate at 4.35%.

It's the first cash rate decision of 2024 and the first in the RBA's new schedule. After a review into the RBA, the government recommended the board only meet 8 times per year instead of 11.

Previously, the RBA met every month apart from January. This year, the RBA will also no longer meet in April, July, or October.

Cash rate hold no surprise despite slowing inflation

Today's cash rate pause comes as no surprise to most economists. Every single one of the experts surveyed by Finder predicted the board would hold the rate.

This comes after positive signs from inflation figures. The RBA increased rates over 2022 and 2023 in response to rising inflation. Inflation reached a peak of 7.1% in December 2022 – meaning the things we pay for cost 7.1% more than they did the year before.

Prices should always grow, but the RBA's target range of how much prices will grow is between 2 and 3%.

Figures released at the end of January show the rate hikes have been working. The Consumer Price Index (the measure of how much costs are changing) grew by 4.1% over the year to December.

The December quarter compared to the September quarter was 0.6% higher – the smallest quarterly rise since March 2021.

This should mean the end of rising interest rates for a while, but borrowers are already starting to question when interest rates will fall.

Why did the RBA not cut the cash rate?

Although the inflation figures are looking positive and are even slowing at a faster rate than the RBA's predictions, economists are not expecting rates to fall in the next few months.

Inflation is still not between the RBA's target range and as we have seen previously, inflation can be "sticky". That means it could have a few bumps in coming down and as such the RBA will remain cautious in its approach.

The good news is that if inflation continues on this downward trend, there are predictions of cash rate cuts later this year.

Head of macroeconomic forecasting at Oxford Economics Australia, Sean Langcake, said that while the inflation data is "running ahead of the RBA's forecast, which should ensure inflation will return to target in a timeframe they deem tolerable" there are still inflationary pressures. He added: "We expect the RBA will be on the sidelines until the first cut in late 2024."

Evgenia Dechter, an economics professor from UNSW, said that "inflation is declining, economic indicators show a slowdown in growth, and unemployment is picking up".

"The RBA is likely to proceed with caution and wait for more supporting statistics before it will start cutting the cash rate," she added.

But borrowers shouldn't necessarily get excited just yet. Some economists are still urging caution, stressing that interest rates could still rise.

Mark Melatos from the University of Sydney warned that "inflation remains above the RBA's target band despite moderating in recent months. House prices appear to have significantly decoupled from incomes and shrugged off the rate increases to date. As long as low unemployment (effectively full employment) persists, the cash rate is unlikely to be reduced and further increases remain a possibility."