Inflation growth at two-year low: does this mean no more rate hikes?

The latest figures from the Australian Bureau of Statistics (ABS) show that Australia has experienced its lowest rate of inflation growth in two years. So, what does this mean for Australia’s interest rates in 2024, and for Australian home loans in turn?

What are the latest inflation figures? 

According to the ABS, the Consumer Price Index (CPI) rose 0.6% in the December 2023 quarter and 4.1% annually. This follows a 1.2% rise in the September 2023 quarter. 

ABS head of prices statistics, Michelle Marquardt, said that the December 2023 quarter saw the smallest quarterly rise since the March 2021 quarter:

“While prices continued to rise for most goods and services, annual CPI inflation has fallen from a peak of 7.8 per cent in December 2022, to 4.1 per cent in December 2023.”

The most significant contributors to the December quarter rise were: 

• Alcohol and tobacco (+2.8%); 
• Insurance and financial services (+1.7%);
• Housing (+1.0%), and;
• Food and non-alcoholic beverages (+0.5%). 

The ABS also released its monthly inflation figures, finding that monthly CPI rose 3.4% in the 12 months to December 2023, compared to a rise of 4.3% in the 12 months to November. 

What does this mean for interest rates?

When the Reserve Bank of Australia (RBA) elected to hike the national cash rate 13 times since May 2022, its motivation was to put downward pressure on Australia's inflation, which had been rising unacceptably high. While inflation eventually peaked at 7.8% in December 2022, the current figures are still above the RBA’s inflation target band of between 2% and 3%, meaning the job’s not done yet.

As part of its November 2023 Statement on Monetary Policy, the RBA forecast that inflation would “decline to 3.5% by the end of 2024 and to reach a little below 3% at the end of 2025.” The new December 2023 quarterly CPI of 4.1% is a little lower than the RBA’s predicted 4.5%, indicating that inflation may be falling a little faster than predicted.

In the minutes of the last RBA Board meeting in December 2023, where it elected to keep the cash rate on hold at 4.35%, the RBA said that it would “continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market” when making its future decisions.

A new Statement on Monetary Policy is scheduled for release following the next RBA board meeting in February 2024, which may include any changes to the central bank’s inflation forecasts.  

Economists from Australia’s major banks may also be adjusting their inflation forecasts and interest rate predictions following the recent CPI figures. While the big four banks recently came into agreement that a February 2024 rate hike was no longer on the cards, the next interest rate cut is currently being forecast to arrive in September 2024 at the earliest. Additional cuts could also potentially be in the pipeline over the rest of 2024 and 2025, depending on the economic conditions and progress towards the RBA’s inflation target band.

While waiting for interest rate cuts to arrive, Australian mortgage holders can still take steps to give themselves a home loan repayment discount. These steps could include:

• Making extra repayments
• Taking advantages of an offset account
• Refinancing to a lower rate
• Refinancing to a lower rate AND making extra repayments

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