Real estate professionals watching for signs of a Melbourne Cup Day rate cut might want to keep the champagne on ice. Compare the Market’s Economic Director, David Koch, says the Reserve Bank of Australia (RBA) could still “go nuclear” and lift rates if inflation doesn’t cool.
“The September quarter CPI figure, due out on October 29, is the one to watch,” he said, warning that even a modest uptick in inflation could see the RBA forced to act.
“If underlying inflation comes in at 3% or above, the Reserve Bank may have no choice but to raise rates.”
Mr Koch said the central bank is walking a fine line, balancing slowing employment figures with sticky price pressures.
“At this stage, they really could go either way,” he said.
RBA’s delicate balancing act
The latest inflation data for August showed headline inflation had risen to 3%, but he said the quarterly CPI figure would provide a clearer view of the factors driving inflation – including export demand and the broader global economic outlook.
“We’ve had a couple of back-to-back monthly CPI data figures come in slightly higher than expected, which is why we saw a hold on rates last month,” he said.
“The RBA has to be so careful right now. It’s a bit of a balancing act and all about keeping that inflation figure inside the target rate.”
His comments follow recent remarks from RBA Governor Michele Bullock, who has cautioned Australians not to assume inflation will continue to fall.
“She’s been uncertain for weeks. If we get a number like 3.2% or 3.3%, the RBA could increase rates to bring inflation back under control,” Mr Koch said.
“It’s 50/50. If inflation comes in around 2.5%, we could see a cut. But anything higher will make the RBA cautious and anything above 3% could trigger a hike.”
The impact of future rate cuts
Borrowers have enjoyed three rate cuts this year, in February, May and August, each trimming the cash rate by 0.25%.
Two more RBA board meetings remain before the end of the year, and even a single additional cut could provide welcome relief for households.
| Loan Size | 0.25% cut | 0.50% cut | 0.75% cut | 1% cut |
|---|---|---|---|---|
| $500,000 | $81 | $161 | $256 | $318 |
| $600,000 | $97 | $193 | $307 | $382 |
| $750,000 | $122 | $242 | $384 | $478 |
| $900,000 | $146 | $290 | $461 | $573 |
| $1,000,000 | $162 | $322 | $512 | $637 |
Calculations assume an owner-occupied variable loan currently at 6.3%, reduced to 5.3% after four 0.25% cuts passed on in full by the bank. Figures are based on a 30-year loan term with no ongoing fees and do not consider principal reduction over time.
