Borrowers can breathe a sigh of relief after hotly anticipated inflation data made it increasingly likely that the RBA will keep rates on hold next week.
But they’re not out of the woods just yet, with the data showing the annual rate of inflation rose for the first time since December 2022.
Inflation data released by the Australian Bureau of Statistics on Wednesday showed the Consumer Price Index (CPI) rose 1% during the June quarter, and 3.8% over the year.
While the quarterly rate of inflation remained steady following a 1% rise in the March quarter, the annual rate was slightly higher compared to last quarter’s result of 3.6%.
However the result was lower than what economists at most of the big banks had expected and broadly in line with the Reserve Bank’s forecasts, putting to bed expectations of a rate rise at the RBA’s next board meeting in August.
Homeowners fearing a rate hike at next week's RBA board meeting are likely to be relieved after the data showed June quarter inflation was in line with expectations. Picture: Getty
Headline inflation is still above the RBA’s inflation target of 2% to 3%, with the central bank forecasting inflation to reach that band by the end of next year.
However, the trimmed mean — which strips out volatile price changes and is the RBA’s preferred measure of inflation — has declined compared to last quarter.
The trimmed mean result came in at 0.8% for the quarter and 3.9% over the year to June.
This was below economists’ expectations and lower than the 1% recorded in the March quarter and 4% over the year to March.
ABS head of pricing statistics Michelle Marquardt said this was the sixth quarter in a row of lower annual trimmed mean inflation, down from a peak of 6.8% in the December 2022 quarter.
Quarterly inflation data is one of the key pieces of information the RBA will consider at its board meeting next week as it decides whether to keep the cash rate on hold at 4.35% or raise it further to bring inflation back to target.
Rate cuts back in focus
The lower than expected result eases the pressure on the RBA to hike rates and means the next move to interest rates is likely to be down, according to PropTrack senior economist Paul Ryan.
He said the lower than expected trimmed mean inflation result meant it was likely that the RBA would hold rates steady at its next board meeting.
“In the scheme of data to come out, this is one of the most important that we've had for some time,” he said.
“The most important thing that the RBA considers are their forecasts for inflation, and this data makes them reassess those forecasts slightly downwards.”
RBA governor Michele Bullock will meet with the RBA board next week to decide the fate of interest rates.
RBA governor Michele Bullock previously warned that the path to get inflation back to target was expected to remain ‘bumpy’, with the higher annual CPI result for June demonstrating the challenges faced in getting inflation under control.
Higher than expected monthly inflation data released last month suggested a rate hike in August could be on the cards, but Mr Ryan said the latest quarterly result meant fears of another hike had eased.
“My assessment is that they don’t view that they need to raise rates,” he said.
“If anything, it will push rate cut expectations earlier, maybe to the middle of next year.”
“The timing with which they lower rates will depend on further data evolutions, but it puts them on a path to lowering rates next year.”
Before today’s inflation result, the big banks remained split over expectations of when the first rate cuts could begin, with predictions ranging from later this year to mid next year.
Westpac chief economist Luci Ellis said the headline inflation figures were in line with the bank's expectations while trimmed mean was a little lower.
"With the disinflation on track, we affirm our view that rates are on hold until November and likely to decline from then," she said.
"Monetary policy operates with a lag, so rate cuts need to start ahead of inflation reaching target. If the [RBA] board waits too long, it will risk undershooting the target for no benefit.
"So rate cuts are likely in the near future, provided inflation continues to traverse the trajectory that the RBA board is seeking to achieve."
Commonwealth Bank head of Australian economics Gareth Aird said inflation was still too high, but the lower trimmed mean result would be welcomed by the RBA board, meaning rates would likely be kept on hold in August.
"The downward inflationary ride has been bumpy as observed by the swings in the quarterly changes in underlying inflation," he said.
"But this is to be expected. The disinflation process is never a smooth one on a quarterly basis."
"The RBA’s aggressive tightening cycle has worked very well to slow growth in aggregate demand in the economy."
"The decision next week to leave policy on hold should be straight forward given the inflation data today has come in line with the RBA’s forecasts."
"We stick with our call for an RBA easing cycle to commence in November 2024," he said.
ANZ expects the first rate cut will come in February next year, while NAB is predicting a cut in May.
Rising housing costs drive inflation higher
The data from the ABS shows housing was one of the biggest contributors to the June quarter rise in inflation, with a 1.1% rise in housing costs driven by rents (up 2%) and new dwellings purchased by owner occupiers (up 1.1%).
Ms Marquardt said the tight rental market and high labour and material costs had pushed housing prices higher.
Rising costs for new housing and rents were among the biggest contributors to inflation in the June quarter, ABS data shows.
“The continuing tight rental market and low vacancy rates caused rental prices to go up 2.0 per cent for the quarter, following a 2.1 per cent rise in the March 2024 quarter,” she said.
However, rent price inflation had eased annually to 7.3% after a 7.8% increase in the March quarter.
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