Don’t bet on pre-Christmas rate cut, economists say

Inflation is heading in the right direction but remains too high to justify the Reserve Bank delivering mortgage relief this year, even if there are no longer fears that the next move in interest rates will be up.

Rate hikes may be off the table, but the Reserve Bank of Australia is still not likely to deliver mortgage holders any relief until next year, economists say. Picture: AAP

Those hoping for a pre-Christmas rate cut are likely to be disappointed, with economists saying inflation is heading in the right direction but remains too high to justify the Reserve Bank delivering mortgage relief this year.

The prospect of a 14th interest rate increase has been largely snuffed out after official consumer price figures this week showed underlying inflationary pressures eased in the three months to June 30, triggering a rapid reassessment of the RBA’s next move in its battle to bring inflation back under control.

While financial markets have flipped from predicting the chance of a rate rise to a 40 per cent probability of a cut by December, RBC Capital Markets chief economist Su-Lin Ong said falling interest rates were more likely a 2025 story.

“Inflation is heading in the right direction, but we are still cautious,” Ms Ong said.

“There are still elements that are sticky and are stubborn. Some are supply side issues, and some are structural – like rents and insurance, and even some of the building costs are still reasonably firm.

“Electricity prices are being artificially lowered.”

Annual inflation accelerated for the first time in 18 months in the June quarter to 3.8 per cent, from 3.6 per cent in March.

The bad news on the headline figure was softened by the fact that the result matched the RBA’s forecasts – suggesting price pressures were still tracking as the central bank had anticipated – while so-called “core” measures of inflation, which remove more volatile price moves, were similarly in line.

Nonetheless, there was plenty of evidence that inflation remained persistent.

Services inflation lifted to 4.5 per cent in the year to June 30, from 4.3 per cent in March. Price growth in goods and services mostly affected by domestic rather than global factors – so-called “non-tradables” – was stuck at 5 per cent.

While analysts at Westpac and CBA doubled down on calls for a rate cut at the RBA board’s November meeting, Barrenjoey chief economist Jo Masters said it would probably take something like a shock rise in unemployment over coming months to justify a move lower this year.

However, the latest inflation figures meant the RBA would still be able to see a “credible path” to its existing plan to bring inflation gradually back to the middle of the 2-3 per cent target range by mid-2026, Ms Masters said.

“Monetary policy is working, and there is this broad disinflationary trend. Rate hikes are now behind us,” she said.

But the chance of a rate cut by December was “slim”.

“You do still have this persistence in inflation, particularly in housing, and there’s not much you can do about that any time soon,” she said. “We hiked less than other central banks, and we are six months or so behind other central banks.”

Westpac chief economist Luci Ellis said while inflation was too high, it was following the RBA’s predicted trajectory back to target.

Dr Ellis said monetary policy decisions had a delayed impact on activity and spending, so the RBA would need to act before inflation was back below 3 per cent, or risk doing unnecessary damage to the economy: “That means that it will soon be time to start cutting interest rates.”