But economists are divided on what this means for the cash rate
The Reserve Bank of Australia is drawing closer to getting inflation under control, according to new commentary from CoreLogic.
Australian Bureau of Statistics data for March showed signs that the economy is gradually cooling down, including a slowdown in inflation for the construction of new dwellings, according to Eliza Owen (pictured above), head of residential research at CoreLogic. Headline inflation dropped to 1.4% in the quarter from 1.9%, while annual inflation fell from 7.8% in Q4 2022 to 7%.
Quarterly core inflation – which excludes the top and bottom 15% of weighted price changes – fell to 1.2% from 1.7% the previous quarter. Annual core inflation is still high at 6.6%, CoreLogic said.
What do inflation figures mean for interest rates?
The Reserve Bank has aggressively raised rates over the past year in an effort to combat inflation. Since May 2022, there have been 10 consecutive rate hikes. The central bank paused its hiking program this month, holding the rate steady at 3.6%. However, many economists believe further hikes are still to come.
According to Owen, it’s hard to tell how the current figures will impact the RBA’s cash rate decision next week.
“Those who were expecting the latest inflation figures to provide foresight into how the Reserve Bank will act at next week’s meeting will be disappointed,” she wrote. “On the one hand, the March figures reinforce that inflation has peaked, as quarterly core inflation dipped for the second consecutive time. It’s also worth remembering that monetary policy changes hit households at a lag. Even if the RBA decides to hold the cash rate steady, mortgage rates will continue to rise and do the work of stemming household spending.
“On the other hand, labour market figures remained tight over the month, consumer sentiment surged (albeit from near record lows), and household spending might be supported by large savings buffers, even as mortgage holders see their rates lift.”
Economists are split on whether the RBA will hike rates again next week, Owen wrote.
“NAB economist Taylor Nugent had actually forecast that a core inflation read of 6.6% for the year (which is [the] result we got) would be ‘inconclusive’ for the May cash rate decision. A 6.7% would have implied a potential hike, and 6.5% leaning toward another hold,” Owen wrote.
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“CBA economists believe the RBA will likely retain a hiking bias, lifting to 3.85% in the May meeting,” she wrote. “Before the release of the March inflation data, ANZ, CBA and Westpac were each forecasting a further 25 basis point rise in the cash rate, though there is some variance in timing.”
Housing market momentum
While there’s still uncertainty over whether interest rates have peaked, housing market conditions brightened in March and have continued to improve this month, CoreLogic reported.
Last month, the CoreLogic Home Value Index rose 0.6%< the first increase since before the rate-hiking cycle began last year. The index has continued to rise through April, although at a “slightly softer” rate of growth, Owen wrote.
“Auction clearance rates have been harder to interpret this month due to volatility around the Easter and ANZAC public holidays, but are still holding higher than through the second half of 2022,” Owen wrote.
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