Analysts Anticipate RBA To Maintain Rates In December

In October, a surprising downturn in inflation was recorded, primarily attributed to diminishing clothing prices and a reduction in supermarket cost pressures. The Australian Bureau of Statistics disclosed that annual inflation dropped from 5.6 percent in September to 4.9 percent. This decline was fuelled by moderating price pressures for consumer goods amid decreased demand.

Contrary to economists' predictions of a 5.2 percent outcome, the monthly consumer price indicator reflected a lower figure, underscoring the prevailing belief that the Reserve Bank of Australia (RBA) will maintain the cash rate at 4.35 percent during its upcoming December 5 meeting. With only an 11 percent probability of a rate increase prior to the data being released, Reserve Bank Governor Michele Bullock emphasised the need for cautiousness in further tightening measures, aiming to balance inflation control without adversely impacting the economy and unemployment rates.

The moderation in underlying price pressures was also evident in October, with inflation excluding volatile items like fruit, fuel, and holiday travel declining from 5.5 percent to 5.1 percent. The RBA's efforts to combat inflation are supported by a stronger Australian dollar, appreciating 2.2 percent on a trade-weighted basis in November due to weakness in the US dollar.

The anticipation that the US Federal Reserve has concluded its rate hikes has bolstered the Australian dollar, rising from US63.2¢ to US66.6¢ this month. This upward trend, if sustained, is expected to exert downward pressure on import costs.

Managing Director of Vista Financial Group Tyson Roberts believes that the lower-than-expected inflation outcome should mean the RBA will hold rates in December. However, the RBA's concerns about persistent inflation in the service sector is a concern and will be monitored when the RBA meets again in early 2024.

Goods inflation has notably decreased over the past year, attributed to supply chain normalisation and consumer cutbacks on discretionary items. Clothing and footwear prices fell by 1.5 percent, while household furnishing price inflation was a mere 0.4 percent. Petrol price inflation witnessed a sharp decline, subtracting 0.3 percentage points from the headline Consumer Price Index (CPI). Inflation across most food items eased, except for volatile fruit and vegetable prices, with lamb prices falling by 9.3 percent and beef prices down by 4.1 percent.

Electricity prices rose by 10.1 percent in the year to October, with the increase mitigated by state and federal government bill rebates. Falling demand and reduced material costs contributed to a notable drop in annual inflation for building a new home, reaching 4.7 percent, significantly below the peak of 21.7 percent in July 2022.

Despite the RBA's progress in taming inflation, intense price pressures persist in the labour-intensive services sector. Rents climbed by 6.6 percent in the past 12 months, driven by increased demand from a surge in migrants and a shortage of rental properties. Additionally, the cost of insurance and financial services jumped by 8.6 percent over the past year, driven by significant price rises in car and home insurance policies.

Looking ahead, the RBA does not anticipate inflation returning to its target band of 2 percent to 3 percent until December 2025. Former RBA Governor Philip Lowe emphasised the importance of central banks restoring inflation within their respective bands promptly, cautioning against credibility hits if delays persist beyond community expectations.