Inflation continues to ease - how will this affect interest rates in August?

The rate at which inflation is growing has eased over the past three months, according to the latest economic data.

The Australian Bureau of Statistics (ABS) quarterly Consumer Price Index (CPI) indicator revealed that annual inflation increased 6.0% in the twelve months to June 2023. Therefore, inflation rose just 0.8% quarter-on-quarter, substantially lower than March’s 1.4% rise.

This represents a 1.0% decrease in the pace of annual inflation from March's 7.0% rise, below economists’ forecasts.

The largest price rises during the quarter were in rents (+2.5%), international holiday travel and accommodation (+6.2%), other financial services (+2.5%), and new dwelling purchase by owner-occupiers (+1.0%).

"CPI inflation slowed in the June quarter, with the quarterly rise being the lowest since September 2021,” according to ABS head of prices statistics Michelle Marquardt. 

“While prices continued to rise for most goods and services, there were some offsetting price falls this quarter including for domestic holiday travel and accommodation and automotive fuel.”

Monthly data illustrates similar trend

The ABS also released the latest monthly CPI data for June, advancing the notion that the pace of inflation is slowing. The monthly indicator rose 5.4% in the twelve months to June 2023. This represents a 0.1% decrease on May’s revised 5.5% figure.

The monthly CPI indicator has been improved through the introduction of a new monthly gas series. As a result, there have been small revisions to the monthly CPI indicator.

The most significant price rises for the monthly series were seen in housing (+7.4%), food and non-alcoholic beverages (+7.0%) and recreation and culture (+6.8%). Offsetting these rises was a significant fall in the cost of automotive fuel (-10.6%).

How will this affect interest rates?

The RBA has lifted the cash rate 12 times over the last 14 months - taking it to 4.10%, the highest it’s been in 11 years.

Following the July cash rate pause, three of four big banks predict that the RBA will likely hike again in August. Only ANZ suggests that an extended pause to rate changes is "most likely". That being said, Westpac and NAB forecast an additional 0.25% increase may occur in September, with a cash rate peak of 4.60%.

In his latest statement on monetary policy earlier this month, RBA governor Philip Lowe highlighted that inflation is still too high and will remain so for some time yet and that household consumption continues to be a significant source of economic uncertainty.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Lowe said.

Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. While there is much debate over whether or not Australia will enter into a recession, it may be more prudent to question the extent to which this forecast slump in economic activity will affect consumer confidence and household debt, and for how long?

RBA announces dates for cash rate decisions

The RBA currently meets 11 times per year to decide whether to raise, reduce or retain the cash rate. From next year, there will be four meetings scheduled for the first Tuesday of February, May, August, and November. See below for all the official dates for 2024.

RBA cash rate meeting dates 2024:

• 5-6 February
• 18-19 March
• 6-7 May
• 17-18 June
• 5-6 August
• 23-24 September
• 4-5 November
• 9-10 December

Under the new system, monetary policy meetings will commence on Monday afternoon and pick back up Tuesday morning. Results of the meetings will be issued at 2:30 pm on Tuesday, followed by a media conference.

Based on these recently announced dates, Australian savers and mortgage holders may be able to get a better idea of when to expect changes to their interest rates, allowing them to plan and budget accordingly.

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