Mortgage holders can again breathe a sigh of relief today as rates remain on hold, despite annual inflation ticking upwards slightly in the June quarter. While good news that they didn’t increase, the more negative news is that the prospect for a rate cut is still some time away.
Why did the RBA keep rates on hold despite inflation rising? There are a number of reasons. The main reason is that inflation came in only slightly higher than expected. The trimmed mean inflation rate came in at 3.9 per cent, only slightly more than RBA forecasts (3.8 per cent) and lower than market expectations (4 per cent). The second is that although we are not in recession, the economy is looking weak. GDP growth was just 0.1 per cent in the March quarter, less than the also weak 0.3 per cent in the December quarter. We will not get June quarter data until next month however it is possible the economy will shrink in that time period.
The third reason is that many of the expenditure items seeing high rates of growth within the inflation time series will not necessarily be impacted by higher rates, and some may in fact become worse. For example, automotive fuel prices growth accelerated in the June quarter, driven by rising conflict in the Middle East and continued cuts by OPEC. An increase in rates may impact demand for fuel marginally however it will be no match for supply side factors. More problematic are rental increases which continue to be a major driver of inflation. Increases in rents are being driven by a lack of rental homes. Higher rates discourage investment in housing and the amount of new development.
At the start of 2024, the market was timing a rate cut for October. Since then, inflation has not come down as quickly as hoped. Now, the timing for a cut is June 2025. Forecasts and market outlooks can of course change quickly but for now Australia is an outlier in terms of the timing of its cuts. Most major economies are now cutting rates. .
The latest central bank to cut rates was the Bank of England which cut rates last week. The US is set to move next month. The jobless rate in that country hit its highest level in three years last week and this sparked speculation that rate cuts could come in a lot quicker than previously expected. These countries will join Switzerland, Sweden, the European Union and Canada which were the first to move.
Nerida Conisbee
Ray White Group
Chief Economist
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