Inflation spike wipes out hopes of September RBA rate cut

A bigger-than-expected jump in inflation has poured cold water on any remaining hopes of a rate cut next week.

Australia’s Consumer Price Index (CPI) came in at 3.0% for August, teetering on the edge of once again breaking out of the Reserve Bank of Australia’s (RBA) desired target range.

Australian Bureau of Statistics (ABS) head of prices statistics Michelle Marquardt confirmed it is the highest annual inflation rate in 13 months. 

The RBA’s preferred inflation figure – the trimmed mean – came in at a more satisfactory 2.6%, slightly down from 2.7% in the 12 months to July.

This latest CPI data comes less than a week out from the Reserve Bank’s next cash rate decision, when the current rate of 3.60% is now almost certainly set to remain unchanged.

While homeowners and borrowers might have been hoping for more rate relief from the bank next week, it’s not all bad news.

While 3.0% is a higher headline figure than what has been seen in the last year, REA Group executive manager of economics Angus Moore said the bank is unlikely to place too much weight on it.

In the same way the bank waited on the more comprehensive June quarter data to make its third rate cut of the year, it’s likely the RBA will hold off on cuts again until the next quarter’s figures have been revealed.

“That said, the RBA is expecting underlying inflation will come in around 2.6% in September, though they are expecting headline inflation to be higher,” Mr Moore said.

Housing figures

Just like last month, housing came in as the largest contributor to the uptick in headline inflation, up 4.5% in August.

Food and non-alcoholic beverages were also a major driver, up 3%, alongside a 6% uptick from alcohol and tobacco.

It comes after markets and economists were surprised the CPI indicator’s 2.8% uptick in July was driven predominantly by household spending, holidays, travel, and eating out.

Outlook ahead

Market expectations of a rate cut next week meeting plummeted to just 6% on Tuesday, the Australian Stock Exchange rate indicator shows.

The rate is still currently at a 28-month low thanks to three cuts from the bank this year. In welcome news for borrowers, a further cut is still being priced in by all four big banks ahead of Christmas.

An 0.25% cut on 4 November has been forecast by ANZ, Commonwealth Bank, Westpac and National Australia Bank following the RBA’s penultimate meeting for the year.

“This is an RBA board that appears comfortable with the current inflation outlook and pace of easing,” Commonwealth Bank head of Australian economics Belinda Allen said.

“We expect another cash rate cut in November to take the cash rate to 3.35% as the RBA continues its gradual and cautious easing cycle.”

The introduction of a new, complete measure of inflation data from the ABS from November is also expected to make it easier for the RBA to make its rates decisions.

The final monthly CPI in its current form will be published on 26 November, reflecting October’s market.

This article first appeared on Mortgage Choice and has been republished with permission.

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