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Odds of an August rate hike slashed as inflation cools

There might be relief ahead for mortgage holders with the odds of an August rate hike slashed after softer-than-expected inflation figures.

According to the Australian Bureau of Statistics (ABS), headline inflation fell to 6 per cent in June from 7 per cent in March –  lower than the RBA’s official forecasts.

While consumer prices also rose just 0.8 per cent in the past three months – the lowest rate since September 2021.

Prior to the CPI release, markets had been pricing in a 54 per cent chance that the Reserve Bank of Australia (RBA) would need to hike the official cash rate to 4.35 per cent at the August meeting next week, however, odds have now dropped to 29 per cent.

Treasurer Jim Chalmers said further evidence that inflation was moderating was “really pleasing to see”.

“We are making progress in this fight against inflation,” Mr Chalmers said.

Canstar Editor-at-Large and money expert, Effie Zahos said the chance that the Reserve Bank may pause the cash rate again has increased. 

“Even though job numbers in June came in surprisingly strong, the unemployment rate is a lagging indicator,” Ms Zahos said.

“If the June retail sales, which come out on Friday, are flat then there is certainly less pressure for the Reserve Bank to hike the cash rate in August.”

REIA President, Hayden Groves said with inflation peaking, it’s time for the RBA to continue to keep rates on hold.

“With the current level below RBA’s May forecast of 6.3 per cent for the year to June it is time not only to continue to keep a pause on further interest rate rises but to rethink the economic orthodoxy on the level of unemployment required for inflation to be neither rising nor falling,” Mr Groves said.

While pressure might be easing on the Reserve Bank board, there are still ongoing concerns for outgoing Governor Philip Lowe.

Goods inflation fell to 5.8 per cent in June, down from a high of 9.6 per cent last year, however, services inflation remains one the biggest problems for the RBA after it jumped to a two-decade high of 6.3 per cent.

According to the ABS, the high level of services inflation was driven by higher prices in a range of services categories including rents, restaurant meals, holiday travel and insurance.

Rental prices across the country have increased 6.7 per cent annually, marking the largest annual rise since 2009 and driven by low vacancy rates and a tight rental market across the country.  

The ABS noted that rents rose 8.9 per cent higher in Brisbane, 5 per cent in Melbourne, and 7.3 per cent in Sydney, over the past 12 months.

Other factors contributing to the price rises were stronger wage growth and increased costs for utilities and rents, while insurance premiums rose across house, house contents and motor vehicle insurance.

The ABS also said that construction costs are continuing to ease, which has been one of the biggest issues impacting the supply of new homes.

Having peaked in the September 2022 quarter at 20.7 per cent, annual inflation has fallen for the past three quarters to 7.8 per cent in the June 2023 quarter. 

Master Builders Australia CEO Denita Wawn said this has been helped by the slowdown in the cost of key home building materials like timber and some metals, however, more homes are needed to help the rental crisis.

“Sadly, there is a continued escalation in rental costs which have just seen their sharpest quarterly jump since 1988,” Ms Wawn said.

“Rents are continuing to accelerate because landlords’ mortgage interest costs have risen so substantially over the past 14 months, and we simply aren’t building enough new higher-density homes to meet rental demand.

Other key metrics such as annual food inflation slowed to 7.5 per cent in the June quarter, down from 8 per cent and the peak of 9.2 per cent.

While annual inflation in the price of clothes fell to 0.3 per cent from 3.2 per cent.

Deloitte Access Economics Partner Stephen Smith said it was now time for the RBA to stop hiking as there is growing evidence that they have lifted rates too far over the past 12 months.

“A large part of the inflation story in Australia was always on the supply side, as has been the case in similar countries around the world,” Dr Smith said.

“And the remaining challenges on inflation are also on the supply side, around housing and energy.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.