Add CategoryThe Reserve Bank of Australia’s original justification for keeping interest rates higher for longer is beginning to look weaker following the release of new data showing inflation has slowed to a three-year low.
Policy makers at the central bank have longed argued that rates have needed to stay higher for longer to control entrenched inflation within the economy, but ABS figures published today showed the Consumer Price Index rose 2.1 per cent over the year to October. This was well within target of the RBA.
ABS head of prices statistics Michelle Marquardt described inflation as “steady” and the lowest since July 2021.
Inflation had also dropped to within the target range of the RBA over the previous month.
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Pressure is mounting on RBA governor Michelle Bullock to deliver a cut.
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Economists have revealed that the inflation change will give the Reserve Bank plenty to think about, but many have expressed doubt that a cash cut will come until early or mid-next year.
This could be a potential problem for the economy as sustained higher rates risk dragging the country into recession.
It comes as housing data has revealed time is ticking for homeowners requiring urgent mortgage relief.
An alarming poll by comparison group Finder.com.au revealed one in seven homeowners would have to sell their home by February or apply for hardship unless interest rates began to fall.
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One in five homeowners could be on the brink of selling.
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Many of these homeowners have unaffordable debt and have burned through their emergency cash reserves over the past two years of elevated interest rates.
About two in five homeowners said a lack of interest rate relief would mean they’d have to slash their expenditure even further to be able to afford their loans over the coming months.
Richard Whitten, home loans expert at Finder, said Aussies had overstretched themselves and were looking for reprieve.
“Interest rates are hitting households hard and many are looking for a way to reduce the pressure,” he said.
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Finder money expert Rebecca Pike said many homeowners had run out of the required funds to hold on to their properties for a few more months.
“Thousands of stressed mortgage holders can’t manage much longer with home loan costs posing a threat to people’s way of life,” Ms Pike said.
“Many will be in a very difficult position by the new year if the RBA hasn’t cut the rates.”
Ms Pike said many borrowers had drained emergency savings topping up their home loan.
It’s reached the point that every dollar makes a difference, homeowners told Finder.
A third said they’d need their repayments to drop by at least $500 a month to be financially comfortable again, while about 14 per cent said they needed their repayments to fall by $1000 a month.
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Ray White Group chief economist Nerida Conisbee said the case for a rate cut before Christmas was not straightforward.
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The ABS indicated the top contributors to the annual movement at the group level were food and non-alcoholic beverages (+3.3 per cent), recreation and culture (+4.3 per cent), and alcohol and tobacco (+6.0 per cent).
Annual CPI inflation fell from 3.8 per cent in June to 2.1 per cent in October due, in part, due to significant price falls in electricity and automotive fuel.
Electricity fell 35.6 per cent in the 12 months to October, which is the largest annual fall in the electricity series ever recorded in the CPI.
“The falls in electricity and fuel had a significant impact on the annual CPI measure this month,” Ms Marquardt said.
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Higher rates are hurting the property market.
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PropTrack economist Eleanor Creagh said the RBA was unlikely to budge soon.
“Outside of an unforeseen shock, a sharp rise in unemployment, or substantially lower underlying inflation, 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.
“Though headline inflation has fallen back to the upper end of the RBA’s 2-3 per cent target range, underlying inflation pressures remain too strong, allowing the RBA to look through the fall in headline inflation.”
Ray White economist Nerida Conisbee said there was both a case for and against a rate cut this year.
“In the case against a rate cut before Christmas, the RBA governor has been steadfast in saying that they won’t cut quickly even if inflation comes within target,” Ms Conisbee said.
“In addition, part of the slowdown is occurring because of the Federal Government’s energy bill fund relief rebates, as well as rent relief being provided by the Government.
Two of Australia’s big four banks are forecasting the first cut to come in May. The other two say February.
“People still seem to have quite a bit of money – as evidenced by spending on travel. The economy isn’t exactly firing but employment growth remains reasonable.”
The case for a cut this year was that the economy could be slowing, Ms Conisbee said
“Quarterly inflation came in below expectations and many of the factors driving inflation were not necessarily demand led. In particular, fruit and vegetable price rises occurred because of adverse weather conditions,” she said.
“Most importantly however is the time taken for interest rate changes to flow through the economy – the risk is that rates are kept too high for too long and the sluggish economic growth turns into a recession.”
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Bendigo Bank chief economist David Robertson said they expected rates to be cut in May, with a 35 basis point cut to 4 per cent to “kick off the cycle”.