Falling inflation offers relief to borrowers, but rate hike concerns linger
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Photo by Ivan S
In a surprising turn of events, annual inflation in Australia cooled more than anticipated in November, providing some relief to household budgets amid the typically high-spending Black Friday and Cyber Monday period. The Consumer Price Index (CPI) rose by 3.4% over the 12 months to November, a notable decrease from October’s 3.8%, sparking discussions on the future of interest rates.
The trimmed mean CPI, a crucial figure closely monitored by the Reserve Bank of Australia (RBA), registered at 3.2%. This figure, while slightly outside the RBA’s target range of 2-3%, marked a small decline from October’s 3.3%. Anne Flaherty, a senior economist at REA Group, commented on the development, stating, “The slowdown is good news, but inflation remains too high.”
This latest economic data arrives on the heels of a challenging end to the previous year for borrowers, which saw an unexpected inflation rise in September that extended into October. The latest figures will likely be a relief for the RBA, which has faced criticism for not accurately forecasting the inflation uptick.
In the lead-up to the data release, Westpac had forecasted that annual inflation would remain unchanged, while the Commonwealth Bank expected a slight easing, predicting a 3.6% annual CPI. The actual 3.4% figure exceeded these expectations, offering a glimmer of hope for households with mortgages.
The primary contributors to November’s inflation were housing, which saw a 5.2% increase, followed by food and non-alcoholic drinks at 3.3%, and transport at 2.7%. Rising electricity costs, rents, and new dwelling prices were significant factors in the housing sector’s inflationary pressure. Notably, dwelling approvals have been on the rise, with Australian Bureau of Statistics (ABS) figures showing a 15.2% increase in approvals in November, reaching a total of 18,406.
As the RBA prepares for its first meeting of the year next month, attention will be focused on the trimmed mean figure, which provides a clearer picture of underlying inflation by excluding the most volatile items. Despite the dip in annual inflation, discussions of potential rate hikes have resurfaced for the first time in over a year.
Both the Commonwealth Bank and National Australia Bank had anticipated a rate rise next month, but this outlook might change following the latest data. Stephen Smith, a partner at Deloitte Access Economics, urged caution, stating, “It would be prudent for the RBA to wait and watch developments in the labour market. Recent softness in employment numbers makes it unlikely that growth in real wages will lift. Any policy response should be careful and cautious.”
The ABS’s new, more comprehensive monthly CPI data, introduced to aid the RBA in making more informed rate decisions, will be under scrutiny at the bank’s upcoming meeting. Anne Flaherty noted, “Should high inflation persist, this will increase the chance of a rate rise come February’s meeting.”
Markets are currently pricing in a 36% chance of a rate hike next month, suggesting that a fourth consecutive decision to hold rates steady is the more likely outcome. RBA Governor Michele Bullock has previously cautioned against further easing, indicating that a prolonged period with the cash rate at its current level of 3.60% is expected by both ANZ and Westpac.
The RBA is set to make its next cash rate decision on 3 February, with the December CPI figures due later this month likely to provide a clearer indication of the future path of interest rates. As the economic landscape continues to evolve, borrowers and economists alike will be watching closely to see how these developments unfold.