In a closely watched economic indicator, Australia’s headline inflation rate held steady at 2.1% in October compared to a year ago, according to data released by the Australian Bureau of Statistics on Wednesday. The result was slightly below the 2.3% pace anticipated by economists but remains comfortably within the Reserve Bank of Australia’s target band of 2-3%.
The underlying inflation rate, as measured by the trimmed mean, ticked up to 3.5% from 3.2% in September. This reading strips out the most volatile price movements to provide a clearer picture of inflationary pressures in the economy.
Cost of Living Pressures Ease Slightly
For Australian households grappling with the rising cost of living, there was some relief in the October figures. Electricity prices tumbled by more than a third compared to a year ago, down 35.6%, as government rebates flowed through to consumers. Transport fuel costs were also 11.5% lower, providing a bit of breathing room for motorists.
Prior to the latest data, both the headline and underlying inflation rates had been on a five-month retreat. While some bounce back was expected due to the composition of goods and services being measured in October and a relatively sharp drop in prices recorded in the same month last year, the overall trend still points to an easing of inflationary pressures.
RBA Watches Data Closely
The inflation figures will be crucial inputs for the Reserve Bank as it mulls its next interest rate move. The central bank has hiked the official cash rate by 425 basis points since May 2022 to the current level of 4.35% in an aggressive campaign to tame inflation.
In recent communications, RBA Governor Michele Bullock has emphasized that the bank pays more heed to the quarterly inflation reports than the monthly data in setting policy. Bullock, who is slated to deliver an important speech in Sydney on Thursday evening, has also stressed that the RBA wants to see evidence that inflation is “sustainably” back within the 2-3% target range before contemplating interest rate cuts.
“The board may start cutting the cash rate – now at 4.35% – before the trimmed mean pace drops below 3% provided the RBA is confident of a decelerating trend.”
– Insight from a senior economist
Investors See Rate Cut Coming, But Not Until Mid-2025
In the lead-up to the inflation data, financial markets were pricing in less than a 10% probability of a quarter percentage point rate cut to 4.1% at the RBA’s final policy meeting for 2024 on December 9-10. Investors see the first reduction in the cash rate as a foregone conclusion by the middle of 2025.
The shifting expectations around the interest rate outlook have major implications for heavily indebted households. Many homeowners are facing a double whammy of falling property prices and higher mortgage repayments as fixed-rate loans taken out during the pandemic stimulus era expire.
According to a senior banking executive, approximately two-thirds of fixed-rate mortgages are set to roll over to higher variable rates by the end of 2024. For a household with a $500,000 mortgage, the jump in repayments could top $1,200 per month.
Balancing Act for RBA
Against that backdrop, the Reserve Bank faces a delicate balancing act. Failing to rein in inflation risks embedding higher price expectations in the economy, which could spark a damaging wage-price spiral. But maintaining restrictive monetary settings for too long could unnecessarily drag on economic growth and employment.
Already, there are signs the rate hikes are starting to bite. Consumer confidence has soured, with the latest Westpac-Melbourne Institute Consumer Sentiment Index falling by 3% to 78.5 in November, deep in pessimistic territory. Retail spending has also slowed markedly, rising by just 0.2% in September, the softest growth in 13 months.
On the flip side, the labor market remains drum tight, with the jobless rate anchored at a 48-year low of 3.4%. And while wages growth has picked up, it is still running well below inflation, suggesting limited evidence of a prices-wages feedback loop at this stage.
Bottom Line
October’s steady inflation result reinforces the likelihood the Reserve Bank will keep interest rates on hold for the remainder of this year as it assesses the lagged impact of its policy tightening on the economy. A further modest retreat in price pressures in the months ahead could open the door to rate cuts in the first half of 2025 if activity cools sufficiently.
But for now, the RBA will likely maintain its hawkish rhetoric and watch incoming data closely to satisfy itself that inflation is genuinely and sustainably headed back to target before contemplating any easing of monetary settings. The next few months will be crucial in shaping the interest rate path in Australia.
