Inflation down - but not enough for an RBA rate cut this year

Scott Kuru October 30, 2024 5 min read

Image by Luis Enrique Ascui/The Age

KEY POINTS

Quarterly inflation data shows annualised inflation was 2.8% at the end of September, with core “trimmed mean” inflation down to 3.5%
At 0.2%, quarterly inflation is the lowest it’s been since June 2020
Despite inflation nearing target levels, analysts expect the RBA to keep rates steady through December, with potential rate cuts postponed by markets until May 2025

All-important quarterly data from the Australian Bureau of Statistics (ABS) shows inflation is continuing to fall in Australia, but probably not fast enough for the Reserve Bank of Australia (RBA) to cut rates this year.

While Australia’s headline rate is now well and truly in the RBA’s target 2-3% band, most analysts believe underlying inflation remains too high for the central bank to be comfortable with lowering the cash rate from its highest point in 13 years.

The details

The Bureau of Statistics says Australia's official inflation measure, the Consumer Price Index (CPI), rose 0.2% in the three months to the end of September 2024, well down on the 1% rise in the previous three months.

“The September quarter’s rise of 0.2% is the lowest outcome since the June 2020 quarter fall, which occurred during the COVID-19 outbreak and was driven by free childcare”, says Michelle Marquardt, the ABS’ Head of Prices Statistics.

That means annual inflation in the year to September 30th was 2.8%—well down on the 3.8% recorded in the 12 months ending June 30th—and slightly below market expectations.

The ABS says the most significant price rises in the September quarter of 2024 were in its Recreation and Culture category (+1.3%), Food and non-alcoholic beverages (+0.6%), and Alcohol and tobacco (+1.3%).

The same data set also shows the full quarterly impact on CPI of large federal and state government electricity rebates, designed to address cost of living pressures, which came into effect in July.

Because these rebates are paid directly to power retailers, who then deduct these amounts from household bills before they are mailed out to consumers, this led to electricity bills in Australia falling a huge 17.3% in the September quarter and 15.8% over the past year.

“Excluding the rebates, electricity prices would have risen by 0.7% in the September 2024 quarter,” the ABS says.

Critics have argued that the rebates have “artificially” lowered Australia’s headline inflation rate in a crude attempt to get the RBA to deliver a rate cut sooner.

However, the central bank has made clear it will “look through” the temporary effect of these subsidies, concentrating on “core” inflation instead.

The ABS quarterly CPI figures show that the RBA’s preferred core inflation measure, the “trimmed mean”, has fallen to an annualised 3.5% at the end of September, down from 4% at the end of June.

What does this mean for interest rates?

This quarterly inflation data from the ABS was widely regarded as the final piece of the economic puzzle the RBA needed to consider at its next board meeting to set interest rates on the 4th & 5th of November.

The central bank has kept the cash rate steady at 4.35% (a 13-year high) for nearly a year.

While the quarterly CPI figures confirm both headline and core inflation have fallen, most analysts believe there’s likely to be no relief this year for homeowners and investors with variable mortgage rate loans.

“The Reserve Bank has been quite worried that we are still in this high inflationary environment,” says AMP’s Deputy Chief Economist Diana Mousina.

“Part of the reason is that Australia’s core or underlying inflation rate is above some of our peers (other developed economies).

“But we lagged the rest of the world on the way up.

“I think that the same thing is happening on the way down.

“It's hard to see today's numbers pushing them to cut rates by the end of this year.

“I don't think we will see a rate cut this side of Christmas, unfortunately,” agrees EY Oceania Chief Economist Cherelle Murphy.

“But I think that come the first quarter of next year, as long as those underlying inflation numbers continue to dissipate, then the RBA will be able to start cutting next year.”

Ms Murphy told the ABC the RBA will be adopting a “policy of least regret” and “hold rates where they are,”

“Because if they get ahead of themselves and inflation is not completely under control, then they certainly don't want to be refuelling inflation, and that will be front of mind for them.”

She also doesn’t expect “a big stream of rate cuts” next year and says, “We're certainly not going back to a situation where interest rates are close to zero.”

Several big financial institutions, such as Westpac, ANZ, and AMP, think rate cuts will start in February next year, but financial markets don’t think the RBA is in any hurry to cut rates.

In the last few weeks, they’ve drastically revised their predictions and are currently not pricing in a full 0.25% rate cut until at least May next year.

Housing pressures

The Quarterly CPI figures continue to show the strong pressure housing is exerting on the cost of living in Australia.

Although annual rent prices have eased from 7.3% at the end of June to 6.7% at the end of September, the ABS says, “rental price growth continues to reflect low vacancy rates and a tight rental market.”

The ABS figures also show that the cost of new dwelling purchases is 4.8% higher than last year.

“Australia’s rate of inflation would be markedly lower if housing cost pressures weren’t so strong,” Master Builders Chief Economist Shane Garrett says.

The take-out

Although Australia’s headline inflation is well and truly back in the RBA’s target band, the central bank is likely to take an extremely cautious approach to rate cuts for fear of letting the inflation genie out of the bottle again.

The RBA is also trying to restore its battered reputation as an economic manager during the Covid years.

You might remember former RBA Governor Philip Lowe’s famous “forward guidance” when interest rates were at the emergency pandemic low of 0.1%. He told Australians that he could not see rates rising “until 2024 at the earliest.”

The central bank's performance has also been roundly criticised again in the Federal government’s official review of the Covid-19 pandemic in Australia.

It found the post-pandemic inflation breakout (annualised inflation reached 7.8% in December 2022) was because the RBA cut interest rates too much and left them too low for too long, combined with too much federal government stimulus money.

“With the benefit of hindsight, there was excessive fiscal and monetary policy stimulus provided throughout 2021 and 2022, especially in the construction sector,” the report concluded.

It found that inflation peaked a full 2% higher than it needed to.

It may be a bitter pill to swallow, but the RBA is desperate not to repeat the mistakes of the pandemic again, even if it means Australians with high mortgage interest repayments will have to suffer for longer.