Inflation figures leave Australian mortgage holders in the dark about next rate decision

Key takeaways

The Reserve Bank of Australia is slowly getting closer to taming inflation, with inflation figures for March showing signs of cooling in the economy, including a slowdown in inflation for the construction of new dwellings.

The ‘trimmed mean’ or ‘core’ inflation figure, which excludes the top and bottom 15% of weighted price changes, fell to 1.2% in the quarter, from 1.7% in the previous quarter, but annual core inflation is still high at 6.6%.

It is uncertain how the latest inflation figures will impact next week’s rate decision, with some economists forecasting a potential hike while others expect a hold.

Construction costs are slowly easing, which could make renovations or building a new home more feasible.

Despite the possibility of a further rate rise, the housing market has shown optimism through March and April, with a rise in the CoreLogic Home Value Index and strong demand amid a rise in overseas migration and tight rental conditions.

Mortgage holders should sit tight as the RBA faces a tough decision next month, with core inflation trending slightly lower than RBA forecasts but other economic indicators remaining strong.

Following ten consecutive rate hikes, mortgage holders may be relieved to learn that the Reserve Bank (RBA) is slowly getting closer to taming inflation.

The ABS inflation figures for March showed further signs of gradual cooling in the economy, including a pronounced slowdown in inflation for the construction of new dwellings.

On a quarterly basis, headline inflation declined to 1.4% in the quarter from 1.9% while annual inflation dropped from a recent high of 7.8% in Q4 last year to 7.0%.

The ‘trimmed mean’ or ‘core’ inflation figure excludes the top and bottom 15% of weighted price changes.

This measure fell to 1.2% in the quarter, from 1.7% in the previous quarter, and a peak of 1.9% in the three months to September.

Annual core inflation, which has a long-run average target of 2-3%, is still high at 6.6%.

How will inflation impact next week’s rate decision?

Those who were expecting the latest inflation figures to provide foresight into how the Reserve Bank will act at next week’s meeting will be disappointed.

On the one hand, the March figures reinforce that inflation has peaked, as quarterly core inflation dipped for the second consecutive time.

It’s also worth remembering that monetary policy changes hit households at a lag.

Even if the RBA decides to hold the cash rate steady, mortgage rates will continue to rise and do the work of stemming household spending.

On the other hand, labour market figures remained tight over the month, consumer sentiment surged (albeit from near record lows), and household spending might be supported by large savings buffers, even as mortgage holders see their rates lift.

To further obfuscate next week’s decision bank and market economists are also divided.

NAB economist Taylor Nugent had actually forecast that a core inflation read of 6.6% for the year (which is the result we got) would be ‘inconclusive’ for the May cash rate decision. A 6.7% would have implied a potential hike, and 6.5% leaning toward another hold.

CBA economists believe the RBA will likely retain a hiking bias, lifting to 3.85% in the May meeting.

Before the March inflation data release, ANZ, CBA and Westpac were each forecastings a further 25 basis point rise in the cash rate, though there is some variance in timing.

Construction pressures slowly easing

The good news is that embarking on renovations, or building a new home, could soon become more feasible, as the rise in construction costs slows down.

The change in the overall housing component of the CPI fell to 9.8% in the year to March, down from a recent peak of 10.7% in the 2022 calendar year.

The largest housing components of the CPI are rents (with a weighting of 5.75%) and the cost of new dwellings (weighing 8.62%), with the latter driving, falls across housing costs.

The increase of costs in new dwelling purchases slowed from a record high of 20.7% in the year to September, to 12.7% over the year to March.

Growth in CoreLogic’s Cordell Construction Cost Index slowed in the year to March, amid reduced growth in materials and shipping costs, more projects being shelved and fewer approvals in the pipeline.

CPI rents continued to accelerate, rising 4.9% in the year to March relative to a 4.0% increase in the calendar year.

CoreLogic’s imputed rent valuations for all properties, which tends to be a forward indicator of CPI rents, have not shown any signs of a slowdown in the March quarter, with growth in rents accelerating to 3.0% across the combined capitals.

Housing market momentum, despite the possibility of a further rate rise

Despite some uncertainty about whether interest rates have peaked, housing market conditions looked more optimistic through March, and have continued to edge higher through April.

In March, the CoreLogic Home Value index rose 0.6%, the first increase since before the rate-hiking cycle in 2022.

Through April, the daily Home Value Index has continued to rise but is seeing a slightly softer pace of growth.

Auction clearance rates have been harder to interpret this month due to volatility around the Easter and ANZAC public holidays, but are still holding higher than through the second half of 2022.

Pre-listing activity has also been volatile but has not pointed to any substantial future uplift in listings volumes over the next few weeks.

There is the chance a further rate rise in May could stunt the green shoots observed in the property market over the past two months, however, other factors look to be outweighing the downside impact of high interest rates.

Fundamentally, demand remains strong amid a sharp rise in overseas migration, together with lower-than-average levels of advertised supply and extremely tight rental conditions.

Mortgage holders to sit tight

Core inflation figures came out slightly lower than RBA expectations, but that doesn’t guarantee the RBA will hold again at its May meeting.

At 6.6%, core inflation is trending slightly lower than RBA forecasts, but other indicators of economic performance remain strong, leaving the RBA with an especially tough decision next month.

About Eliza Owen Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator. Eliza holds a first class honours degree in economics from the University of Sydney