Households hold their breath as inflation data signals RBA rate cut locked in

A sufficient drop in underlying inflation has opened the door for another cash rate cut in less than two weeks.

Both monthly and quarterly CPI data were released on Wednesday, with the Reserve Bank of Australia (RBA) set to lean on the latter to determine if monetary policy needs to continue to be restrictive.

The data confirms what the bank has been waiting on, with trimmed mean inflation now at its lowest since December 2021.

Annual inflation rose 2.7% over the year to the June quarter, down from 2.9% recorded in the March quarter.

While it’s a touch higher than the 2.6% the RBA forecast back in May, REA Group executive manager of economics Angus Moore is confident inflation is sitting where the central bank expects.

“It looks consistent with where the RBA had thought it would land having seen the partial May monthly inflation data, based on the governor’s recent commentary about that data,” he said.

A third rate cut?

This week’s data marks two consecutive quarters with trimmed mean inflation inside the RBA 2-3% inflation target.

REA Group executive manager of economics Angus Moore says inflation figures back to tracking in line with expectations. Picture: supplied

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 “While underlying inflation is still a bit higher than the RBA would like, it is clearly within their target band of 2-3% now, and moving in the right direction,” Mr Moore said.

“That should give the RBA the comfort.”

The RBA shocked households when it held interest rates steady in July, despite economists and financial markets widely predicting it would slash interest rates from the current 3.85%.

Instead, RBA governor Michele Bullock said the board wanted to wait for this inflation data before deciding on whether to cut for a third time this year.

“This is the more information on inflation the board were lacking in July, to be able to cut rates at the upcoming monetary policy meeting,” Mr Moore confirmed.

“By cementing the inflation case to cut, it removes any awkwardness around the signs of a renewed softening in the labour market,” Westpac Group chief economist Luci Ellis agreed. “This would otherwise conflict with its response to inflation risks.”

Deloitte Access Economics partner Stephen Smith is also confident the latest data “should see the RBA cut rates in August”.

“The current cash rate of 3.85% is still well above the RBA’s estimate of the neutral cash rate,” he said. “In other words, the bank knows its monetary policy settings are restricting growth.

“This is hard to justify given ongoing global economic volatility and the continued sluggishness of our own domestic economy.”

The Reserve Bank of Australia faced criticism in the wake of its last board meeting. Picture: Getty

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Positive news for mortgage borrowers

Despite ongoing geopolitical uncertainty, the CPI reading is significant for households still on the hunt for more savings.

Markets were pricing in a 95% chance of a cut earlier in the week before the release of the data – a figure likely to rise as we move into August.

All eyes will now be on the big banks and other lenders who may look to get ahead and lower rates on variable loans ahead of the Reserve Bank’s next meeting.

Monthly data limitations

Changes to the information the bank receives on inflation is now set to change after the shock rate hold earlier this month.

RBA governor Michele Bullock said the bank did not have enough information to support its predictions at its July meeting. Picture: supplied

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Speaking after the decision, Ms Bullock admitted the board did not have unanimous confidence in the Australian Bureau of Statistics’ (ABS) monthly CPI indicator.

Since then, it has been confirmed Australia will transition to a new and complete monthly CPI reading from November – one the ABS is confident will bring the country more into line with the information other G20 nations every few weeks.

“The transition will provide better information for monetary and fiscal policy decisions that have a direct impact on all Australians,” ABS statistician David Gruen said.

The RBA board will make its next decision on the cash rate on 12 August.

This article first appeared on Mortgage Choice and has been republished with permission.