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Is another interest rate pause on the cards?

Inflation in Australia continues to fall, sparking hopes of a second consecutive interest rate hold next week.

According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 1.4 per cent in the March quarter of 2023, bringing the annual rate of inflation down to 7 per cent. 

The latest figures show a decrease from the 7.8 per cent annual increase recorded in the December quarter of 2022.

“CPI inflation slowed in the March quarter, with the quarterly rise being the lowest since December 2021,” ABS Head of Prices Statistics Michelle Marquardt said.

“While prices continued to rise for most goods and services, many of these increases were smaller than they have been in recent quarters.”

The most significant contributors to this quarter’s rise were medical and hospital services (up 4.2 per cent), tertiary education (up 9.7 per cent), gas and other household fuels (up 14.3 per cent) and domestic holiday travel and accommodation (up 4.7 per cent). 

“Prices for medical and hospital services typically rise in the March quarter as GPs and other health service providers review their consultation fees, and the Medicare Safety Net is reset at the start of the calendar year,” Ms Marquardt said.

“This year some private health insurance premiums also increased in January, adding to the price rise for medical and hospital services.

“Tertiary education fees are also indexed at the start of the year. This quarter additional strength was seen in tertiary education as changes in student contribution bands and fees introduced in 2021 as part of the Jobs-ready Graduates Package continued to flow through to the index.”

Annually, CPI rose 7 per cent, with new dwellings (up 12.7 per cent), domestic holiday travel and accommodation (up 25 per cent) and electricity (up 15.5 per cent) the most significant contributors. 

 “The annual increase in March of 7 per cent was lower than the 7.8 per cent rise in December and 7.3 per cent rise in September,” Ms Marquardt said.

“Annual inflation for goods of 7.6 per cent was down from the 9.5 per cent recorded in December, due to price falls for goods such as furniture, household appliances and clothing in the March quarter, as well as automotive fuel prices easing in recent quarters.

“However, annual inflation for services was 6.1 per cent, up from 5.5 per cent in the December quarter and is the highest since 2001.”

Real Estate Institute of Australia President Hayden Groves said the data confirmed inflation was dropping and this should prompt the Reserve Bank of Australia to keep interest rates on hold at its May 2 meeting.

“With the CPI having peaked late last year as was forecast by the RBA it is time for it to continue to keep a pause on further rate rises at its meeting next week allowing additional time to consider additional data showing the lagged impact of the previous ten rate increases and assess the outlook for the economy,” he said.

RateCity.com.au Research Director, Sally Tindall said it would be a “close call” on Tuesday as to what the RBA would do with interest rates.

“A second pause would buy the RBA more time to see how households are holding up against the 10 rate hikes to date. This round of inflation data gives the Board cover to do this,” she said.

“That said, at 7 per cent, there’ll be no popping of champagne corks just yet.

“Inflation in Australia might be moving in the right direction, but ultimately it’s still too high. There’s a chance the RBA could fire off one more hike to bed down its trajectory. Borrowers need to prepare for this possibility.”

Ms Tindall said for a homeowner with a $500,000 debt at the start of the rate hiking cycle, another 0.25 per cent rise would increase their monthly repayments to more than $1000.

“Many families are still only up to their eighth or ninth increase to their monthly repayments,” she said.

“They’ve still got at least one to go, even if the cash rate doesn’t move an inch from this point on.

“While many economists are predicting cash rate hikes as soon as the end of this year, borrowers should keep their heads down and focus on getting through the next few months.

“It’s going to be a long, tough winter for many households around the country. If you don’t think you can make it through without breaking the bank, stick up your hand and ask for help.”

Canstar’s Editor-at-Large and money expert, Effie Zahos, said inflation was heading in the right direction but the RBA was still likely to be concerned.

She said a rate pause was a possibility but questioned if it would be the right move.

 “If the Reserve Bank decides to hit pause again in May this could send the wrong signal about the state of the economy,” she said.

“Inflation is still well above the target rate so the rate hike cycle may not be over.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

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