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RBA’s August showdown: Has inflation saved borrowers from another hike?
Inflation has eased for the third month in a row, falling to 3.8 per cent in June and giving the RBA some much-needed relief, but will it be enough to avoid a rate hike?
New data from the Australian Bureau of Statistics has delivered a surprise drop in inflation, fuelling hopes among millions of mortgage holders that interest rates will remain on hold.
In June, the Consumer Price Index (CPI) rose 3.8 per cent, slightly lower than the headline inflation of 4.0 per cent in May and 4.2 per cent in April.
RBA’s preferred measure of inflation, the trimmed mean remained steady at 3.6 per cent.
The largest contributors to annual inflation in June were housing, which rose by 6.8 per cent impacted by electricity costs and new dwellings.
ABS head of price statistics Rachael McCririck said electricity continued to be a major contributor to inflation, with household energy costs climbing 22.4 per cent over the year.
“This is largely because government rebates which reduced household electricity bills have ended.”
“Annual inflation for New dwellings has reached its highest level in almost three years, at 5.8 per cent. This was driven by builders passing on higher material and labour costs,” Ms McCririck added.
The next largest contributors to inflation were food and non-alcoholic beverages, recreation and culture, both rising by 3.3 per cent.
While the fall in headline inflation delivered some relief for households, the underlying figures painted a more complicated picture for the RBA.
Trimmed mean inflation, which strips out volatile price movements and continues to be closely watched by the central bank, remained unchanged at 3.6 per cent annually.
While the result was below the RBA’s latest forecast, it marked the 12th consecutive month that underlying inflation has remained at or above 3 per cent, keeping pressure on policymakers.
The latest figures come after RBA Governor Michele Bullock warned on Tuesday that the board will not hesitate to hike the cash rate if needed.
“...if it looks like [that] inflation is not coming down then I think the Board has some difficult decisions to make in terms of raising interest rates”.
“The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed,” Bullock said.
However, she said that the central bank must also weigh inflation risks against signs of a slowing economy, with unemployment rising by more than the RBA had anticipated.
Currently, all the major banks have forecasted a hold in the cash rate for the August meeting.
Westpac, which previously predicted two further cash rate increases in August and September, has now changed its forecast following CPI data.
The banks’ economists now expect the official cash rate to remain at 4.35% for the next 12 months, with a first cut in August 2027.
Similarly, a majority of economists have been expecting the cash rate to remain on hold at the end of the Board’s 10-11 August meeting.
According to PRD chief economist Dr. Diaswati Mardiasmo, the RBA decision remains a 50/50 on hold or hike.
“Inflation rate have gown down, no doubt. But its still too high/higher than the 2-3% target rate. Plus, it's the higher interest rates that are keeping inflation down and on a declining trend,” Mardiasmo told SPI.
She said a rate hold would provide a boost to confidence across the property market, maintaining buyers' borrowing capacity and providing greater certainty, encouraging more demand.
Similarly she said improved confidence would benefit sellers making it a more favourable time to consider listing.
For agents, Mardiasmo said that a stable cash rate would create an opportunity to encourage hesitant clients to make a move.
She said a hold would continue supporting growth in already strong markets such as Brisbane, Perth and Adelaide, while potentially helping Sydney and Melbourne move towards recovery.
On the contrary, Mardiasmo said that a rate hike would further deter the property market as borrowing capacity would continue to decrease and sellers would be more hesitant to list.
“Days on market, auction clearance rate and activity might slow further, prompting more local research and being very strategic on how to list/sell will be key.
“[Another hike] will moderate price growth in Brisbane, Adelaide, Perth, which will help with the affordability piece for first home buyers.”
Canstar.com.au data insights director, Sally Tindall, said that the June inflation figures were good news for borrowers but that it was still too early to celebrate.
“The RBA Board is walking a tightrope. On the one hand it has rising unemployment and a complete loss of consumer confidence,” Tindall said.
“On the other it has sticky core inflation and a ticking clock, because the longer the problem persists, the harder it is to shift, with the Governor yesterday noting that “credibility is hard won and easily lost”.
“A pause in August looks like the most probable outcome, however, borrowers should keep a buffer in their budgets just in case.
Currently, Australia stands out with one of the highest cash rates around the world at 4.35 per cent compared to the USA at 3.50-3.75 per cent, the UK at 3.75 per cent and Europe at 2.40 per cent.
Tindall said that an additional 0.25 percentage-point hike would add $122 a month to a $800,000 mortgage with 25 years remaining, cumulating an extra $485 since the beginning of the hike cycle.
“The next Board meeting will be a line-ball decision, not a slam dunk, and borrowers need to be prepared for a hike just in case the ticking clock wins out,” she concluded.
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