No rate cuts until December 2025 say investors as inflation rises again

Economists are sounding the alarm for those already under mortgage stress after new figures showed inflation in Australia is showing no signs of easing.

Economists are sounding the alarm after new figures showed inflation in Australia is showing no signs of easing, putting the Reserve Bank of Australia (RBA) in another dilemma as Aussies await the next call that will affect interest rates.

Investors have pushed back the timing for the Reserve Bank of Australia’s first interest rate cut until December 2025, after the new inflation figures emerged on Wednesday.

According to the Australian Bureau of Statistics, annual inflation climbed to 3.6 per cent in April from 3.5 per cent in March, driven by significant hikes in health insurance premiums and weather-induced spikes in fruit and vegetable prices.

This uptick surpassed market expectations of a 3.4 per cent increase, while headline inflation has hovered around 3.5 per cent since December.

The figures were higher than market expectations. Investors pushed back the timing for the RBA’s first cash rate cut to December 2025 from May 2025. Markets price a 20 per cent chance of a rise by September.

With Stage 3 tax cuts just a month away, the injection of extra cash into the pockets of millions has left economists worries inflation will climb further.

While the stimulus will make scarce little difference in the lives of regular Australians, with those on the average wage getting about $36 extra in their hand per week, the overall effects on the economy could drive prices up further still.

Some economists believe the RBA may be compelled to hike rates again to curb inflation in demand-sensitive sectors like consumer goods and services, to counterbalance persistent inflation in less sensitive areas.

That would come as a major blow for those already struggling with mortgage payments, with figures showing over a million Aussies are already in mortgage stress.

Another rate hike would come as a major blow for those already struggling with mortgage payments, with figures showing over a million Aussies are already in mortgage stress. Picture: NCA NewsWire / Max Mason-Hubers

“The disinflationary process in Australia appears to have stalled out so far this year after encouraging declines over 2023. The upshot of today’s inflation result is that interest rates are likely to remain at current restrictive levels for an extended period – with little relief likely this side of Christmas,” Betashares chief economist David Bassanese said via the Australian Financial Review.

Market expectations suggest the RBA will hold the cash rate steady at 4.35 per cent until May 2025, when the first 0.25 percentage point rate cut is expected.

Treasurer Jim Chalmers attempted to pour cold water on the latest figures, saying the quarterly inflation data was a more accurate measure of current price increases in Australia.

“As we’ve said many times the monthly inflation indicator can be volatile and is less reliable than the quarterly measure because it doesn’t compare the same goods and services month to month,” Chalmers said.

Meanwhile, Shadow Treasurer Angus Taylor criticised federal government spending, asserting that Australians face “one of the highest and most persistent rates of inflation of any advanced economy”.

Consumers have reacted to gargantuan price rises by cutting back spending across the board, as relatively low wage growth sends more and more Aussies into financial stress.

Treasurer Jim Chalmers attempted to pour cold water on the latest figures. Picture: Tracey Nearmy/Getty Images

RBA governor Michele Bullock. Picture: NCA NewsWire / Nikki Short

According to fresh data released by the Australian Bureau of Statistics on Tuesday, retail spending in April rose 0.1 per cent from March.

This followed a 0.4 per cent fall in March 2024 and a 0.2 per cent rise in February 2024.

“Underlying retail spending continues to be weak with a small rise in turnover in April not enough to make up for a fall in March,” Ben Dorber, ABS head of retail statistics, said.

“Since the start of 2024, trend retail turnover has been flat as cautious consumers reduce their discretionary spending.”

Sean Langcake, head of Macroeconomic Forecasting for Oxford Economics Australia, described the rise as meagre, saying retail sales have been broadly unchanged over the past seven months.

Clothing sales were particularly weak, falling 0.7 per cent in the month.

Food sales also fell back after a strong March, which was inflated thanks to an earlier-than-usual Easter.

“Consumers have reigned in their spending in response to a host of cost-of-living pressures, causing retail sales growth to grind to a halt over much of the past year,” Mr Langcake said.

“There is some help on the way for household finances from the May budget, with tax cuts and subsidy payments set to boost cashflow from July.

“But this is unlikely to be enough to completely shake consumers out of their current funk. “We expect momentum in retails sales will remain subdued over 2024.”

Originally published as No rate cuts until December 2025 say investors as inflation rises again