Reserve Bank to hold interest rates steady despite inflation falling to 3.5-year low – realestate.com.au

Inflation has fallen to 2.8% in the past three-and-a-half years, although experts warn mortgage holders waiting for the expected rate cut will be left hanging by the Reserve Bank.

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

Michelle Marquardt, head of prices statistics at the ABS, confirmed the lowest annual rate of inflation since the March 2021 quarter, adding that the 0.2% rise was “a drop in June 2020, which took place during the COVID-19 outbreak driven by free childcare It is the lowest result since the quarter.

According to experts, although the inflation will decrease significantly, this will not create the basis for the much-desired interest rate cut.

Trimmed average inflation – an alternative measure that discounts certain underlying price changes – came in at 3.5% in September. This is the RBA's preferred measure of the situation and remains outside the bank's target, despite falling for the seventh consecutive quarter.

Ms. Marquardt confirmed the trimmed average, which ruled out significant declines in both auto and electric this quarter.

Interest rate reduction

Before today's data release, major banks had expected CPI to come in at 2.9%, while economists had widely predicted a downward trend.

The ABS's head of price statistics, Michel Marquardt, confirmed that inflation has been at its lowest annual rate since the March 2021 quarter. Image: Australian Bureau of Statistics

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Eleanor Creagh, chief economist at REA Group, said anyone looking for a rate cut before Christmas could be disappointed.

“Short of significantly higher unemployment, lower core inflation or an external shock, the RBA is likely to stand still in the coming months as the board tries to steadily push inflation back into its target range,” he said.

Gov. Michele Bullock then took a hawkish line, insisting the quarterly numbers will determine her next move.

“Inflation has trended lower since late 2022 and while headline inflation has fallen to the upper end of the RBA's 2-3% target range, underlying inflationary pressures remain very strong, allowing the RBA to consider lowering headline inflation.” Mrs. Creagh said.

Even so, banks have continued to cut rates on fixed-rate products over the past few weeks, a positive sign for potential homebuyers, now supported by lower inflation.

Stephen Smith, a partner at Deloitte Access Economics, said the rate hikes were “doing their job in slowing the economy and curbing demand-driven inflation,” and strengthened his case for a rate cut next year..

Cost of living crisis?

It's easy to assume that low inflation has pushed Australia further out of the cost-of-living crisis, but experts warn it's only one measure in a complex picture.

REA Group chief economist Eleanor Creagh says the Reserve Bank will hold off on cutting interest rates this year. Image: provided

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Today's data showed property owners and landlords stomaching higher council rates, which rose by 4.9% in the biggest increase since 2014.

Councils generally review rates once a year, a figure reflected in September data from the ABS.

National home prices rose a small 0.4% last month, as the spring selling season opened up more options for buyers heading into the final quarter of the calendar year.

However, capacity pressures are reflected in house prices, with Ms Creagh noting continued strong rent increases alongside high construction costs.

The housing stock grew by 2.8% in the twelve months to the September quarter of 2024, the slowest annual increase since the September quarter of 2021. The main contributors were rents and owner-occupied new home purchases.

“The residential construction industry has faced capacity constraints and higher costs,” Ms Creagh explained. “The resulting tight housing supply is exacerbating already high rents and home prices, as well as chronic housing shortages.”

Despite the RBA's conservatism, Mr Smith argued that the case for a rate cut was clear.

“A single 25 basis point reduction would save a household with an average variable mortgage about $1,600 a year,” he said. “But this singularity will not change Australia's economic fortunes: concerted, meaningful economic reforms across all jurisdictions are needed to boost productivity and growth.”

Melbourne-based Mortgage Choice broker Josh Almond said he expected potential buyers to be disappointed that rate cuts were still imminent.

“The best thing mortgage brokers can do is to educate customers on why this may be and why there will be no change between now and the end of the year, and to continue to assess customers' options based on what they see in front of them now,” Mr Almond said.

Economic view

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

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

“Larger mortgages in New South Wales and Victoria mean households will receive a bigger increase than expected rate cuts. Still, these states are expected to be relatively hard hit by a decline in outbound migration to Australia. Meanwhile, lower commodity prices will affect Queensland and Western Australian exports.”

Ms Creagh said it was clear the RBA believed the level of demand in Australia was too high relative to supply.

“Market services inflation remains above average, reflecting very strong domestic inflationary pressures, which is another focus for the RBA given its persistence,” he said.

“The September quarter CPI reflects that while tight monetary policy continues to further balance supply and demand, there is more to come. As a result, we hope that there will be no redundancies until the end of the year.”

RSM Australia economist Devika Shivadekar said consumer spending will be “key” in the run-up to Christmas as the RBA decides what to do next.

“Upcoming retail events such as Black Friday, Cyber ​​Monday and the holiday season provide prime opportunities for increased spending towards the end of the year.

“It remains to be seen whether demand from the combined effects of easing inflation, government subsidies and tax cuts and the holiday spending season will push the central bank to postpone a rate cut.”