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Rates likely to stay on hold after inflation tumbles

Inflation has fallen to its lowest rate in two years, with experts now predicting the Reserve Bank of Australia (RBA) will leave rates on hold at next week’s meeting.

According to the Australian Bureau of Statistics (ABS), CPI came in at 4.1 per cent in the December 2023 quarter, down from 5.4 per cent in September and well below the 7.8 per cent recorded 12 months ago.

Monthly inflation for December also fell from 8.4 per cent in 2022 to just 3.4 per cent in 2023.

The trimmed mean also fell, coming in at 4.2 per cent per annum this quarter, the fourth consecutive quarterly drop.

Zippy Financial Director and Principal Broker Louisa Sanghera said, the annual result was one of the sharpest falls in recent history and showed the central bank was trigger-happy on rate hikes.

“Borrowers had to cope with the most rapid rate of interest rate increases on record as the Reserve Bank pumped up repayments, almost in a frenzy, without giving mortgage-holders the benefit of allowing much time to pass between each increase,” Ms Sanghera said.

“The November rate rise, in particular, was completely unnecessary and I said as much at the time.

“Now, inflation has dropped so quicky that the Reserve Bank must move to an easing bias at its meeting in February with rate cuts on the agenda in coming months, too.”

CoreLogic Head of Research Eliza Owen said falling inflation has implications for monetary policy.

“The more inflation comes in under expectations, the firmer the case for interest rates remaining on hold next week, and coming down later this year,” Ms Owen said.

“A reduction in interest rates is likely to boost housing demand.

“As seen in the rental market, fundamental demand for housing is very strong, but demand for home purchases has been influenced by high interest costs and limited borrowing capacity.”

RateCity.com.au Research Director, Sally Tindall, said this latest round of inflation data is fantastic news.

“The result confirms the worst of Australia’s inflation woes are now well and truly behind us,” Ms Tindall.

“It’s also further evidence the cash rate is at the peak of this current cycle.

“While the board will almost certainly keep the cash rate on hold at next Tuesday’s meeting, all eyes will be on both the statement and the governor’s press conference, to see what clues she leaves, if any, as to the timing of any future cash rate cuts.”

She said while further hikes are now unlikely, the possibility of cash rate cuts may take a number of months to eventuate.

“Australia’s inflation battle isn’t over just yet,” she said.

“While the annual headline inflation rate is now almost half of what it was at the peak in the December 2022 quarter, at 4.1 per cent there’s still a way to go before it hits the midpoint of the RBA’s target band, which is 2.5 per cent.

“The board is unlikely to get to this finish line by putting the cash rate in reverse anytime soon.”

Real Estate Institute of Australia (REIA) President Leanne Pilkington said that the data suggests rates hikes have finished.

“The lagged response to the successive interest rate hikes are showing up in the CPI and other economic data,” Ms Pilkington.

“The pointers are that we have seen the end of rate rises and if this continues home buyers can anticipate a rate reduction later this year.”

Canstar’s Group Executive, Financial Services, Steve Mickenbecker said the falling inflation figures restore the economy’s trajectory towards the two to three per cent target band and should satisfy the Reserve Bank that it doesn’t need a further rate rise in February.

“Another quarter with a result like this would see annual inflation fall to 3.3 per cent bringing it within striking distance of the Reserve Bank’s three percent upper limit,” Mr Mickenbecker said.

“This is a welcome piece of good news to mortgage holders who must feel they have done more than their share to put the economy back on track.

“Even for those without a mortgage, the going has been tough over the past year with the cost of living up by 4.1 per cent.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.