Quarterly results mean August cash rate to remain at 4.35%, experts predict
In a hopeful sign for borrowers, most experts believe the latest quarterly inflation figures should be enough to convince the Reserve Bank of Australia to leave the official cash rate at 4.35% when the board meets next week.
The Australian Bureau of Statistics released the Consumer Price Index (CPI) June 2024 quarter figures on Wednesday, July 31, showing inflation rose 1% compared to the March quarter and rose 3.8% annually.
ABS head of prices statistics Michelle Marquardt (pictured above, second from left) said the June quarter rise was the same as the 1% rise in the March 2024 quarter.
The annual rise of 3.8% for the June quarter was up from 3.6% in the March quarter. “This is the first increase in annual CPI inflation since the December 2022 quarter,” Marquardt said.
But more importantly, one of the underlying inflation measures – annual trimmed mean inflation, which excludes the top and bottom 15% of price changes – was 3.9%, down from 4% in the March quarter.
Underlying inflation is the RBA's preferred measure of inflation which it takes into consideration when deciding on interest rates and as it continues to drive inflation down to the 2% to 3% range.
“This is the sixth quarter in a row of lower annual trimmed mean inflation, down from the peak of 6.8% in the December 2022 quarter,” Marquardt said.
The ABS also released the monthly CPI inflation data for June which revealed a rise of 3.8% in the 12 months to June, down from a rise of 4% in the 12 months to May.
Experts react to latest CPI inflation data
Most economists and finance experts have welcomed the latest ABS quarterly data, which met or came in below market expectations, and they predict the Reserve Bank will now keep the cash rate unchanged when the board meets and makes its OCR decision on Tuesday, August 6.
Bendigo Bank chief economist David Robertson (pictured above, far left) said the welcome deceleration in core inflation – down to 0.8% in Q2 and 3.9% year-on-year – was the main feature of the CPI report.
“While headline inflation rose marginally to 1% in Q2 and 3.8% year on year, confirming that rate cuts are still some distance away, the recent speculation of a possible RBA rate hike next week remains very unlikely,” Robertson said.
“It was also pleasing to see the monthly CPI indicator for June fall to 3.8% and a slight dip in underlying measures.”
Robertson said Bendigo Bank’s forecasts for the official cash rate remained unchanged from the start of the year.
“We see no move (up or down) in 2024, but a series of RBA cuts in 2025. The [quarterly] data aligns with our opinion that restrictive interest rates are helping to moderate inflation, but the frustratingly slow pace of moderation means the RBA may not be in a position to cut rates until May 2025.”
Dr Paul Mazzola (pictured below), lecturer in banking and finance at the University of Wollongong Faculty of Business and Law, said the fact that the underlying rate of inflation only increased by 0.8% in the June quarter, which resulted in a reduction to 3.9% from 4.0% in the same rate over the year to the March quarter, was a positive result and below market expectations.
“The main drivers for the quarter haven’t changed that much,” Mazzola said.
Rents increased by 2% in the quarter and 7.3% for the year; hospital and medical services were up 2.1% and (+6.7% annually); new dwelling purchase costs rose 1.1% (+5.1% annually); insurance premiums were up 3.1% (+14% annually).
Electricity rose 2% (+6.7% annually); petrol was up 1.7% in the June quarter, (down 7.7% annually), and fruit (up 10.6% in the quarter after three consecutive quarterly falls, and 4.7% from a year earlier). The government’s ‘relief’ measures reduced the inflation rate for electricity to 6% for the year to June from what would otherwise have been 14.6%.
“Given that we achieved what I term a ‘benign’ result, I can’t see a strong case for the RBA to increase the cash rate target next week,” Mazzola said.
“We need to remember that the trend is still heading in the right direction - towards the target range of between 2% and 3%, coming down from the peak of 7.8% in December 2022. The RBA recognises that there is quite a lag between cash rate changes and its impact on inflation, and I believe they will continue to show this patience.”
Mazzola said this trait of the RBA differed from central banks in US, UK, Canada and NZ which had been more aggressive with their monetary policy.
“The RBA’s patience is important to ensure that the unemployment rate doesn’t runaway and allows the economy to gradually adjust to these new settings.
“The inflation battle is becoming a long-term assault – and there is wisdom in the patience that the RBA is exhibiting – a wisdom that will hopefully insulate us from future unacceptable unemployment rates and significant declines in GDP growth and possibly even a recession.”
Independent economist Harley Dale (pictured above, second from right), who has previously worked for Creditor Watch and the Housing Industry association, said Australia should avoid a rate hike next week based on the June quarter ABS data “but there is no beautiful, magic moment here”.
“It’s not a great result,” Dale said in a Linkedin post. “Nobody ever expected that it would be. Inflation remains too high.”
Dale said the key was that the trimmed mean measure in Q2 grew by 0.8% (he had predicted 0.9%), yielding annual growth of 3.9% compared to 4% per cent in 2024 Q1.
“We’re not out of the woods yet, but if the RBA acts on today’s result that could prove perilous for confidence and economic activity.”
Canstar group executive financial services Steve Mickenbecker (pictured above, far right) held a more negative view when it came to the latest inflation data.
“The increase of the annual inflation rate from 3.6% for the March quarter to 3.8% for June is bad enough, but the lack of progress on a quarterly basis is particularly disturbing,” Mickenbecker said.
“After the promising 0.6% inflation rate for the December 2023 quarter, we have now had two quarters at 1.0%.”
Mickenbecker said the Reserve Bank inflation target band of 2% to 3% was looking a long way off and “another quarter with a 1% rise will almost demand another cash rate increase”.
“At that rate, we’re tracking towards 4% percent annual inflation by the end of the year.”
He said the RBA would be weighing up the risk of losing control of the inflation agenda and allowing inflation expectations to become entrenched, against raising rates now and slowing the economy to the point of major job losses.
Another 0.25% rate increase would cost a borrower on a $600,000 mortgage about $100 extra per month.
Key factors driving inflation
Drilling down into the CPI June quarter figures, Marquardt said the most significant contributors to the rise in inflation were housing (+1.1%), and food and non-alcoholic beverages (+1.2%).
She said quarterly growth in housing was driven by rents (+2%) and new dwellings purchased by owner-occupiers (+1.1%).
“The continuing tight rental market and low vacancy rates caused rental prices to go up 2% for the quarter, following a 2.1% rise in the March 2024 quarter.”
Higher labour and material costs drove the 1.1% rise this quarter for construction of new dwellings.
The rise in food and drinks was driven by fruit and vegetables (+6.3%), meals out and takeaway food (+0.6%), and meat and seafood (+1.3%).
“Fruit and vegetable prices rose this quarter as unfavourable growing conditions drove higher prices for grapes, strawberries, blueberries, tomatoes and capsicums,” said Marquardt. “This was the highest quarterly rise for Fruit and vegetables since 2016.”
In terms of the annual inflation rate of 3.8%, the main contributors to the increase were housing (+5.2%), food and non-alcoholic beverages (+3.3%), and transport (+4.6%).
The annual rise in housing was driven by rents (+7.3%) and new dwellings purchased by owner-occupiers (+5.1%)
“Prices rose for goods such as tobacco, new dwellings, automotive fuel and fruit. Annual services inflation continued to be impacted by higher prices for rents and insurance,” Marquardt said.
Do you think the latest inflation figures are good enough to convince the RBA to keep the cash rate at 4.35%? Share your views below.
