Australia’s monthly and quarterly inflation rate came in lower than expected this week, showing signs that it may be gradually falling towards the RBA’s target range of 2%-3%.
But the question remains whether the latest figures will be enough to avoid the RBA raising the cash rate again at next Tuesday’s board meeting – or if inflation still holds any relevance to influencing the decision about the cash rate.
Zac Peteh (pictured above left), director of Mint Equity, said despite major economists utilising the data to predict changes, the past 12 months have demonstrated the “lack of consistent scientific basis” behind the RBA’s actions.
“Bullock has asserted that achieving the RBA’s inflation target of 2-3% requires an increase in unemployment. The RBA’s objective can be accomplished by creating financial pressure on businesses through interest rate increases, compelling them to reduce staff numbers,” Peteh said.
“The most direct method to achieve a higher unemployment rate is to raise operational costs to a level where immediate cost-cutting measures become necessary. While other cost reduction strategies may have a time lag, redundancies have an instant impact on a company’s profit and cash flow.”
The latest ABS Consumer Price Index (CPI) data released Wednesday showed headline inflation rose by 0.8% in the June 2023 quarter and 6.0% annually, the lowest quarterly rise since September 2021.
This was lower than the figure expected by most economists.
The ABS also released the monthly CPI indicator, which rose by 5.4% in the 12 months to June. This continued the trend of decreased monthly inflation numbers dropping for the second month in a row.
Even so, Peteh’s prediction was that the RBA would still increase the cash rate on Aug. 1 – just not with the primary purpose to curb inflation.
“The upcoming rounds of rate hikes will primarily focus on businesses’ debt, but as a byproduct, consumer home loans will also be affected.”
However, Joanne Nugent (pictured above right), Mortgage Choice broker in north-west Brisbane, said the lower-than-expected inflation data will be “a good thing” for borrowers in the short term.
“I don’t believe the RBA will aggressively continue to increase rates as the previous cash rate increases continue to impact the spending habits of borrowers,” Nugent said.
Financial markets agree, with the odds of a rate hike in August dropping from just over 50% at the start of the month to around 14% on July 26, according to ASX data.
Nevertheless, Nugent has been preparing a repayment “stress test” to her clients regardless of any assessment rate buffer to ensure they are still comfortable under a variable rate loan with repayments at the current rate plus 0.5%.
“I believe the RBA may still increase rates – perhaps not immediately – but to a slightly higher level before they begin to stabilise and – hopefully – reduce in late 2024 and early 2025,” Nugent said.
What opportunities exist for borrowers as inflation drops?
Peteh said borrowers won’t experience any advantages from inflation in the “foreseeable future”.
“The cost-of-living benchmarks set by banks will remain unchanged for a considerable period. Until we have a prolonged period of stable low inflation, banks are unlikely to adjust their living expenses calculations or the HEM,” he said.
“However, there is a positive development where several lenders are reducing the serviceability buffer to 1% for dollar-to-dollar refinances through discretionary interest rate buffer reductions. This change is particularly beneficial for those categorised as mortgage prisoners as it enables them to refinance to more competitive interest rates.”
Nugent said it’s important to recognise that just because inflation has begun to reduce – it does not mean that interest rates will follow.
“The RBA has increased rates owing to inflation peaking around 7%, which is two or three times above the target range. Accordingly, inflation needs to come down quite a bit before the RBA will likely back off further rate rises; and even further before we see the interest rates begin to fall,” she said.
Nugent said securing rates at the historic lows experienced during the pandemic may be “another generation away”.
“Those low rates were in fact part of the property with inflation getting out of control as access to finance was cheap and that made spending easy and attractive during that period,” Nugent said.
“I do hope once rate stabilise that lenders will then begin to reintroduce some more competitive rates without having to price based on anticipated rate rises. Fixed rate pricing is indicative of what the lenders believe will occur with the cash rate – but as we all know, they still get it wrong, as does the RBA, highlighting the complexities and intricacies of economic forecasting.”
