Expecting an interest rate cut this year? Think again

The prospect of a cut in official interest rates by the Reserve Bank of Australia (RBA) this year has receded, following the release of the latest monthly inflation figures from the Australian Bureau of Statistics (ABS).

The news is likely to be greeted with dread by homeowners with a large mortgage, who are currently experiencing the highest interest rates in more than a decade and a cost-of-living crisis.

However, most analysts still think it’s unlikely the RBA will raise interest rates again in this cycle. 

The details

Australia’s monthly Consumer Price Index or inflation measure rose 3.6% in the 12 months to April 2024.

That follows a 3.5% rise in the 12 months to March and was above market expectations of a 3.4% outcome.

It also sees annual inflation at a five-month high. 

Rising rents and higher building costs helping to push inflation higher

According to the ABS, the most significant price rises were in the Housing (4.9%), Food and non-alcoholic beverages (3.8%), Alcohol and tobacco (6.5%) and Transport (4.2%) categories.

Helping to push the CPI number higher than expected was data that shows rents increasing 7.5% in the year to April, which the ABS says “continues to reflect strong demand for rental properties and tight rental markets.”

In monthly terms, rental prices rose 0.5% in April, down from a 0.6% rise in March. 

Rents would have actually made more of a contribution to inflation, but the ABS points out that Commonwealth Rent Assistance (CRA) payments to lower income Australians increased from the 20th of March.

The Bureau says excluding the CRA increases in March and April, would have seen rents rise another 0.7% in both months.

New dwelling prices also rose 4.9% in the 12 months to April, reflecting builders continuing to pass on higher costs for labour and materials to their customers.

Will the RBA raise rates again?

The Reserve Bank’s preferred measure of inflation - the so-called “Annual Trimmed mean” indicator - shows inflation in April was 4.1%, up from 4% in March. 

The RBA is mandated to keep inflation in a target band of 2-3%, and it has pledged to return Australia to that level of inflation by the end of next year.

Of course, the only real tool the RBA has in its locker to achieve that is through the movement of interest rates.

The central bank has already hiked interest rates 13 times in order to slow the economy and curb runaway inflation, which peaked at 8.4% in December 2022.

So will the RBA hike rates again?

At face value, the fact that inflation in Australia appears to have plateaued and even risen slightly would seem to strengthen the argument that the RBA should raise the cash rate again from 4.35% - where it’s been since November last year.  

However, the majority of economic analysts say weak retail sales data and other economic indicators don’t indicate another inflation break-out is likely.

“Monthly inflation is volatile and (the latest CPI figure is) consistent with the RBA’s 3.8% year-on-year (inflation forecast) for this quarter, so it’s unlikely to bring on a rate hike, especially given poor retail and construction data,” said AMP Chief Economist, Shane Oliver.

“But it will reinforce higher-for-longer rates for now.”

“See you in 2025, rate cuts,” was the sarcastic take on the inflation numbers by independent economic analyst Evan Lucas.

ANZ Bank still believes inflation will have fallen enough later in the year for the RBA to start cutting the cash rate at its November meeting, although Senior Economist Catherine Birch said “risks remain tilted towards a later start” for interest rate cuts.

Perhaps the most interesting take on the current state of the Australian economy and the implications for interest rates comes from Warren Hogan, economic advisor to Judo Bank.

A few months ago, he was predicting that the RBA would actually increase rates three more times before the end of 2024.

He’s since backtracked on that prediction, telling SKY News he changed his mind after a road trip speaking to businesses in Canberra, Melbourne, Sydney and Brisbane where he was told that consumer spending was down markedly.

“(Income tax) bracket creep alone has taken $41 billion out of household budgets in the last two years, that’s a pressure that’s there,” he said, “So even though the RBA hasn’t raised rates this year, and only raised them once this financial year, we can still see the soft retail spending because of that bracket creep”.

“They're not going to raise rates while the consumer’s this weak, even if employment remains strong and even if inflation is just bouncing around at the top of that sort of 3% to 4% level”.

The bottom line

If you have a mortgage and are holding out for some sort of interest rate relief, don’t expect any help from the Reserve Bank until next year at the earliest. 

Talk to your bank or broker to see if they can get you a better retail mortgage rate, as competition among lenders for a larger slice of the lucrative housing finance pie remains strong.

The other clear message is that the ongoing housing shortage will keep home prices and rents high.

The figures are there in black and white in ABS CPI data - rental growth is still extremely strong,  and the increasing costs of building new homes will curb new housing supply in the short term.