Rates to remain on hold as CPI provides the RBA with a temporary leave pass

Key takeaways

The CPI rose 1.0% in the June 2024 quarter.

Over the twelve months to the June 2024 quarter, the CPI rose 3.8%, up from 3.6% in the March 2024 quarter. This is the first increase in annual CPI inflation since the December 2022 quarter.

The most significant price rises this quarter were Housing (+1.1%), Food and non-alcoholic beverages (+1.2%), Clothing and footwear (+3.1%), and Alcohol and tobacco (+1.5%).

The stage is set for the RBA to leave the cash rate on hold next week, despite a rise to Australia’s annual inflation rate from 3.6 per cent to 3.8 per cent.

The Reserve Bank will be weighing up the risk of losing control of the inflation agenda and allowing inflation expectations to become entrenched against raising rates now and slowing the economy to the point of major job losses.

The stage is set for the RBA to leave the cash rate on hold next week, despite a rise to Australia’s annual inflation rate from 3.6 per cent to 3.8 per cent.

While this is the first rise in annual inflation since December 2022, the result is in line with the RBA’s own forecasts, keeping its plans to return inflation back to target within an acceptable time frame intact – for now.

Trimmed inflation, the RBA’s preferred measure, clocked in at 3.9 per cent annually, a fraction higher than the 3.8 per cent predicted by the Reserve Bank, but not enough to push it into action just yet.

Of course, the Reserve Bank will be weighing up the risk of losing control of the inflation agenda and allowing inflation expectations to become entrenched against raising rates now and slowing the economy to the point of major job losses.

Another 0.25 percent rate increase now will cost a borrower around $100 extra per month on their $600,000 loan, piling further pain on borrowers amidst indications that many are very much struggling under the weight of higher repayments.

ABS Consumer Price Index, Australia - annual movement

Source: ABS Consumer Price Index, Australia, Quarterly CPI and Monthly CPI indicator, annual change (%).

RBA’s current inflation forecasts - May 2024

Source: RBA. *Actual data.

Borrowers should still plan for a hike

While the RBA is set to hold the cash rate for the 6th consecutive meeting on Tuesday, the central bank will almost certainly remind the country further interest rate hikes cannot be ruled out.

The bottom line is, at 3.8 per cent, inflation in Australia is still too high.

For someone with a $500,000 loan at the start of the hikes, another 0.25 percentage point hike would increase their monthly repayments by $75. If they have not renegotiated their rate since the start of the hikes, it would represent a total increase of $1,285.

Impact of one 0.25% rate hike on mortgage repayments

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest on the average variable owner-occupier rate of 2.86 per cent at the start of the hikes.

RateCity.com.au research director, Sally Tindall, said:

“Australia’s annual inflation rate is now officially tracking in the wrong direction.

At 3.8 per cent, there is a long, and most likely bumpy, road ahead of us to get it back down to 2.5 per cent.

Over the last few meetings, the RBA has been deploying a ‘wait-and-see’ strategy to see if it can ride out this current blip in inflation without having to fire off a 14^th rate hike.

Luckily, this result still fits within the RBA’s timeline to return inflation back to target by mid-2026, buying it more time to continue with its current plan.

However, the clock is ticking for the RBA. If Australia’s inflation rate doesn’t start coming back down soon, or worse still, continues in the wrong direction, the Board will have to act.

We expect the RBA will once again, refuse to rule anything in or out at the end of its meeting next Tuesday.

It’s not just the RBA that’s been given a reprieve, borrowers across the country now have more time on their side to prepare for a potential rate hike, should one eventuate.

If you haven’t accounted for the extra dollars from your stage three tax cuts, put that money aside as safekeeping.

If that money is already patching up a hole in your budget, now is the time to look at other ways to take the pressure off.

Don’t just wait for the RBA and the government to find a solution to these inflation woes. See where you can beat the price rises by switching providers, shopping smarter, and even seeing how you might earn more money."

Current big four bank cash rate forecasts

Source: RateCity.com.au

About Sam Alaaeddin With well over a decade's experience in asset and wealth management, Sam is an Elite Wealth Planner at Metropole and leverages his expertise to help clients achieve their wealth management goals. He holds a bachelor’s degree in law and commerce (Finance) and a Diploma in Financial Planning.