Reserve Bank likely to hold firm on interest rates despite inflation tumble to 3.5-year low

Inflation has sunk to a three-and-a-half year low of 2.8%, though experts warn mortgage holders anticipating imminent interest rate cuts are going to be left hanging by the Reserve Bank.

Australian Bureau of Statistics’ (ABS) September data showed inflation was officially back within the Reserve Bank of Australia’s (RBA) 2-3% target range, after a small rise of 0.2% in the quarter.

ABS head of prices statistics Michelle Marquardt confirmed the lowest annual inflation rate since the March 2021 quarter, adding the 0.2% rise is “the lowest outcome since the June 2020 quarter fall which occurred during the COVID-19 outbreak, driven by free childcare”.

While inflation had moderated substantially, it would unlikely pave the way for a much-desired rate cut, experts said. 

Trimmed mean inflation – an alternative measure which discounts certain major prices changes – came in at 3.5% in September. This is the RBA’s preferred measure of the state-of-play, and despite falling for the seventh consecutive quarter, it remains outside the bank’s target.

Ms Marquardt confirmed the trimmed mean this quarter excluded significant falls in both automotive and electricity.

Interest rate cuts 

Ahead of the release of today’s data, the big banks had been expecting CPI to come in at 2.9%, with economists also widely predicting the downward trend.

ABS head of prices statistics Michelle Marquardt confirmed inflation is at its lower annual rate since the March 2021 quarter. Picture: Australian Bureau of Statistics

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REA Group senior economist Eleanor Creagh said anyone looking out for an interest cut before Christmas was likely to be disappointed.

“Short of substantially higher unemployment, lower underlying inflation or an external shock, the RBA is likely to remain on hold in the months ahead as the board look to sustainably return inflation to the target range,” she said.

Governor Michele Bullock has been toeing a hawkish line after headline inflation fell into the bank’s target zone last month, insisting the quarterly figures would be the determiner of its next move.

“Inflation has been trending down since late 2022 and although headline inflation has fallen back to the upper end of the RBA’s 2-3% target range, underlying inflation pressures remain too strong, allowing the RBA to look through the fall in headline inflation,” Ms Creagh said.

Despite this, banks have continued to slash rates on fixed-rate products over the past few weeks, a positive sign for prospective home buyers, now backed up by much lower inflation.

Deloitte Access Economics partner Stephen Smith said interest rate hikes “have done their job in slowing the economy and quashing demand-led inflation”, strengthening the case for a rate cut next year.

Cost-of-living crisis?

It’s simple to assume that lower inflation pulls Australia further from the cost-of-living crisis, but experts warn it is only one measure in a complex picture.

REA Group senior economist Eleanor Creagh says the Reserve Bank will hold off on interest rate cuts this year. Picture: Supplied

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Today’s data showed property owners and landlords were stomaching high council rates, which increased by 4.9% in the largest rise since 2014.

Councils generally reviewed rates once a year, with the figure reflected in the ABS’ September data.

National home prices increased a small 0.4% last month according to the September PropTrack Home Price Index, with the spring selling season opening up a wider choice for buyers coming into the last quarter of the calendar year.

However, capacity pressures are reflected in housing costs, with Ms Creagh noting strong increases in rents continuing alongside higher construction costs.

Over the twelve months to the September 2024 quarter, the housing group rose 2.8%, the lowest annual rise since the September quarter of 2021. The main contributors were rents and new dwelling purchases by owner occupiers.

“The residential construction industry has been challenged by capacity constraints and higher costs,” Ms Creagh explained. “The consequent tight housing supply is exacerbating already high rents and home prices as well as the chronic housing shortage.”

Despite the RBA’s conservatism, Mr Smith argued the case for a rate cut is clear.

“A single 25 basis-point cut would save a household with an average variable mortgage around $1600 a year,” he said. “However, this alone won’t turn around Australia’s economic fortunes: what is also needed is concerted, meaningful economic reforms across all jurisdictions to boost productivity and growth.” 

Melbourne-based Mortgage Choice broker Josh Almond said he expected prospective buyers to be disappointed that rate cuts were still not likely imminent. 

"The best thing mortgage brokers could do is to help educate clients as to why this may be the case and why there won't be any change between now and the end of the year, as well as to continue to keep just assessing clients' options based on what they see in front of them right now," Mr Almond said. 

Economic outlook

Audit giant Deloitte also noted the economic outlook for Australia’s states and territories was varied despite a relatively strong job market nationally.

“Slower inflation, lower interest rates and higher household incomes are set to add to consumer spending across the board, but some jurisdictions will benefit more than others,” its latest Investment Monitor report read.