Will inflation push back rate cuts this year?

The latest figures from the Australian Bureau of Statistics (ABS) show that Australia’s annual inflation rate is continuing to decline. But will it be enough for a long-awaited interest rate cut to arrive before the year’s end?

What are the latest inflation figures?

According to the ABS, the Consumer Price Index (CPI) rose 1.0% in the March 2024 quarter and 3.6% annually. This follows a 0.6% rise in the December 2023 quarter.

The most significant contributors to the March quarter rise were:

• Education (+5.9%);
• Health (+2.8%);
• Housing (+0.7%), and;
• Food and non-alcoholic beverages (+0.9%).

ABS head of prices statistics, Michelle Marquardt, said that the quarterly rise in Housing was driven by Rents (up by 2.1%) and New dwellings purchased by owner-occupiers (up by 1.1%).

"Rental prices rose 2.1% for the quarter in line with low vacancy rates across the capital cities. Rents continues to increase at their fastest rate in 15 years.”

The ABS also released the monthly CPI indicator, which rose 3.5% in the 12 months to March 2024, compared to a rise of 3.4% in the 12 months to February 2024.

What does this mean for interest rates?

Many Australian homeowners are currently struggling with their home loan interest rates, with the Reserve Bank of Australia (RBA) having hiked the national cash rate 13 times since May 2022. These hikes were intended to take on Australia’s high inflation, which peaked at 7.8% in December 2022. As the RBA’s target band for inflation is between 2% and 3%, the current rate of 3.6% is still too high for comfort.

As part of its February 2024 Statement on Monetary Policy, the RBA forecast that inflation would decline to 3.2% by the end of 2024, and to 2.8% by the end of 2025. It’s not yet certain if inflation will moderate to match the RBA’s predictions, which forecast 3.3% inflation by June 2024.

Following the last RBA Board meeting in March 2024 where the cash rate was kept on hold, RBA Governor Michele Bullock said that "we're not ruling anything in and we’re not ruling anything out” in regard to monetary policy. Depending on the economic data for the rest of the year, the RBA could choose to keep the cash rate on hold, or even hike the cash rate by another 25 basis points to help keep inflation on schedule.

Following the latest inflation data, some economists have adjusted their own cash rate forecasts. For example, while Westpac previously predicted a rate cut by September, this has now been pushed back to November 2024.

Westpac chief economist, Luci Ellis, said the RBA “will probably continue to be cautious about services inflation and domestic pressures broadly for a few months yet. We therefore do not expect any change to the messaging about not ruling anything in or out for another few months.”

Some economists are predicting that the RBA could make additional cuts in 2025, depending on the economic conditions and progress towards the RBA’s inflation target band.

But if you don’t want to wait for the RBA or your bank to give you an interest rate cut, you can consider taking steps to give yourself a home loan repayment discount, such as:

• 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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