Drop in inflation enough to shift the RBA back into neutral over summer

October’s drop in annual inflation from 5.6 per cent to 4.9 per cent, according to the ABS’ monthly consumer price index (CPI) indicator, is likely to be enough for the RBA to shift the cash rate back into neutral over summer.

While October’s monthly CPI result is nearing half of what it was at the peak in December 2022 (8.4 per cent), rises in August and September mean that today’s CPI indicator of 4.9 per cent is the same rate it was in July of this year. That said, inflation excluding volatile items and holiday travel, which came in at 5.1 per cent, is lower than it was in July and the lowest rate since April 2022.

Today’s result was a critical piece of the puzzle ahead of the RBA’s December Monetary Policy Meeting. The increase in unemployment to 3.7 per cent and drop in retail trade by 0.2 per cent will also bolster the case for the RBA to hold the cash rate steady at 4.35 per cent.

While the Black Friday sales are set to boost retail trade data next month, it is unlikely to be enough to push the RBA into firing off another hike ahead of Christmas.

Does that mean we are finally at the peak for the cash rate?

All big four bank economic teams believe the cash rate will hold next Tuesday. CBA, Westpac and ANZ believe the cash rate has now peaked in this current cycle with just NAB the only bank predicting one more hike early in the New Year.

Should the Board choose to hike in February, the average borrower with a $500,000 loan at the start of the hikes last May, could end up paying a total of $1,286 more a month on their mortgage.

Potential impact to borrowers if the cash rate rises to 4.60%

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

RateCity.com.au research director, Sally Tindall, said: “While the cash rate is likely to remain on hold next Tuesday, this doesn’t mean borrowers should let their hair down over summer.”

“Monthly CPI is now moving back in the right direction, but the last two sets of results have shown us just how quickly bumps in the road can spring up,” she said.

“Most households haven’t begun paying for the November rate hike, which is likely to start coming out of their bank accounts from the New Year.

“On top of this, the RBA could still plate up another hike at the first meeting of 2024, particularly if it looks like people have been letting the purse strings go over summer.

“If you’ve got a mortgage, plan for at least one more hike. If it doesn’t happen, then you’ll be able to put that extra cash back into your loan,” she said.

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