03 9598 8002
| BEAUMARIS |
GEELONG
| COLAC
CLIENT PORTALMAKE A BOOKING

RBA Under Pressure For Rate Cuts After Inflation Update

July 31, 2024

The Reserve Bank of Australia (RBA) is facing increasing pressure to consider rate cuts following the latest inflation update. The Consumer Price Index (CPI) rose by 1% in the June quarter and 3.8% annually, according to new data from the Australian Bureau of Statistics. These figures were largely in line with expectations, providing some relief to mortgage holders who feared another interest rate hike.

Inflation Figures and Economic Impact

The CPI increase was driven primarily by rises in housing costs (up 1.1%) and food and non-alcoholic beverages (up 1.2%). Despite these increases, the overall inflation rate suggests that the RBA may hold the official cash rate steady at its upcoming meeting. The current cash rate stands at 4.35%, and the latest data has eased concerns about further hikes.

Economists are now suggesting that the RBA might be more inclined to consider rate cuts in the near future. The inflation numbers indicate that the pressure for multiple rate hikes has diminished, and there is a growing expectation that the RBA will adopt a more dovish stance, potentially signalling rate cuts later this year.

Economic Predictions and Market Reactions

Several economists have weighed in on the likelihood of rate cuts. The probability of an August rate hike has decreased, although it cannot be entirely ruled out. The underlying Q2 CPI data suggests that inflation in Australia has stabilised around 4%, but concerns about persistent domestic services inflation remain.

Treasurer Jim Chalmers noted that the figures were broadly in line with the RBA’s forecast and showed that underlying inflation was continuing to moderate. This moderation is a positive sign, but inflation is still more persistent than desired.

Insights from Economists

AMP’s chief economist highlighted that the inflation figures were not as severe as feared, suggesting there is no immediate case for a rate hike, especially with quarterly retail sales down. Other economists echoed this sentiment, indicating that while a rate hike is unlikely, mortgage holders are not entirely out of the woods. The RBA may still need to hike rates if inflation does not fall as expected.

Moody’s Analytics predicts that the RBA will hold interest rates steady in its August meeting but does not foresee rate cuts happening immediately. The expectation is that rates will remain at 4.35% until at least February next year.

Big Banks’ Forecasts

The major banks have varied predictions regarding future interest rates. Commonwealth Bank and Westpac forecast rate cuts in November this year, while ANZ and NAB have pushed their forecasts to 2025. The average borrower has seen their interest rate increase significantly, leading to higher monthly repayments and increased mortgage stress for many Australians.

Recent data revealed that a significant number of households would be forced to sell if interest rates remain high into next year. If the RBA were to hike rates again, it would further strain borrowers, with an estimated additional cost of $100 per month on a $600,000 loan for a 0.25% hike.

Annual Inflation Trends

The annual rate of inflation has risen to 3.8%, up from 3.6% at the start of the year. This marks the first increase in annual CPI inflation since the December 2022 quarter. While the headline inflation increase was anticipated, the “trimmed mean” measure of inflation, which the RBA closely monitors, fell slightly from 4% to 3.9%.

The RBA aims for the trimmed mean inflation to fall within the 2-3% range, and it has been declining for the past six quarters. This trend is encouraging, but the persistence of inflation in certain sectors remains a concern.

Sector-Specific Inflation

Inflation in the services sector, which is labour-intensive, increased to 4.5% in June from 4.3% in March. Consumers continue to face high prices for everyday services, including veterinary care, dining out, and haircuts. Insurance prices have also risen significantly, driven by higher home insurance premiums due to natural disasters.

The housing sector remains a significant source of inflation. Rent inflation edged lower to 7.3% in June but remains near its highest rate since 2009. The lack of home building and strong demand have driven rental vacancy rates to record lows. Additionally, the cost of home building has remained high, partly due to state government infrastructure projects pushing up material and labour costs.

Market Expectations

Investors now believe that the next move by the RBA will be an interest rate cut rather than a rise. Trimmed mean inflation came in slightly above official forecasts but was softer than market expectations. This has led traders to revise their interest rate bets, with a rate cut fully priced in by February 2025.

The RBA has raised interest rates less aggressively than its international counterparts, aiming to keep the jobless rate as low as sustainably possible. However, this approach has resulted in inflation staying higher for longer.

The latest inflation data has provided some relief to mortgage holders and has opened the door for potential rate cuts by the RBA. While the immediate future may see rates held steady, the ongoing economic pressures and persistent inflation in certain sectors suggest that rate cuts could be on the horizon. As always, staying informed and prepared for potential changes in interest rates is crucial for managing your financial well-being.

FINANCE NEWS & BLOGS

SUBSCRIBE TO OUR NEWSLETTER

Stay in the know with the latest updates, insights, and exclusive content delivered straight to your inbox.

First Name imageLast name logoEmail Address logo
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Follow Us On

Vista Financial Group