Inflation’s up and now the money world’s divided on when the RBA will cut interest rates
A shock jump in the Reserve Bank’s preferred measure of inflation has killed any hope of an interest rate cut next week and sent financial markets into a spin.
A Melbourne Cup Day interest rate cut is off the table after the latest inflation figure exceeded Reserve Bank governor Michele Bullock’s threshold of a “material miss” to the upside of the bank’s forecast.
The central bank’s preferred gauge of underlying price pressures – the trimmed mean – jumped 1 per cent in the September quarter against the June quarter, smashing the median economists’ estimate of 0.8 per cent and was well above the 0.6 per cent the RBA had pencilled in, back in August.
That lifted annual trimmed mean inflation to 3 per cent, which is at the top of the RBA’s target band and above forecasts of 2.7 per cent. The RBA noted that this was the first rise since December 2022.
Stocks fell sharply in response and the ASX 200 index was down 1 per cent to a two-week low of 8922.
The Australian dollar rose 0.3 per cent to a three-week high of US66.07c. The three-year bond yield jumped 11 basis points to 3.56 per cent while the 10-year rate rose 5 basis points to 4.22 per cent.
Money markets, which previously priced in a 40 per cent chance of a rate cut next week, now predict virtually no chance of cheaper money before Christmas.
More troubling for borrowers was that markets have now pushed back expectations of another 25-basis-point cut in the cash rate to 3.35 per cent from February all the way to May.
“A rate cut is now a late scratching from Melbourne Cup Day festivities,” said Betashares chief economist David Bassanese.
“Indeed, today’s numbers are so bad they also place the prospect of a February rate cut in even greater doubt.”
The data represents a material miss by any measure. The RBA governor earlier this week said a deviation of 30 basis points from forecasts would be “material” from her perspective.
Indeed, the quarterly trimmed mean outcome was 40 basis points above the RBA’s assumption.
The inflation surprise was broad based but boosted by a 9 per cent quarterly jump in electricity prices, which are now up 23.6 per cent over the year. Housing costs, rents, and transport also contributed to the surge.
Commonwealth Bank, which had expected one final cut in February, scrapped that forecast entirely and now expects the cash rate to stay at 3.6 per cent for a prolonged period.
The bank’s internal spending data, which has been picking up steam since March, shows a consumer-driven cyclical upswing has emerged larger and faster than expected.
That stronger spending environment appears to have allowed businesses to rebuild margins after a couple of tough years, contributing to the sticky inflation in services and recreation categories.
Services inflation, which tends to reflect domestic demand pressures, rose to 3.5 per cent annually from 3.3 per cent – a particularly disappointing result for a central bank hoping to see evidence that price pressures were cooling.
“The overall sticky level of service inflation points to an economy still operating at a high level of capacity and with pockets of still limited competition,” Mr Bassanese said.
The RBA has cut rates three times since February, bringing the cash rate down from 4.35 per cent to 3.6 per cent. Some economists still expect two further cuts, but the timing has become murky.
Westpac chief economist Luci Ellis said a February cut was “far from certain now, given the size of the upside surprise this quarter”. The bank is conducting a full reassessment of its cash rate outlook.
ANZ head of Australian economics Adam Boyton kept his forecast of a final cut in February but warned that the RBA may not cut until May or perhaps not at all.
“The hurdle for any easing this year is now very high,” he said.
Some analysts went further. RBC chief economist Su-Lin Ong removed her last two rate cut forecasts entirely, declaring “this easing cycle is likely over unless a much weaker labour market emerges.”
While inflation remains stubbornly high for a bank that’s targeting the “midpoint” of its 2 per cent to 3 per cent target band, the unemployment rate jumped unexpectedly to 4.5 per cent in September, suggesting the jobs market is starting to crack under the weight of elevated interest rates.
The unemployment rate was 3.5 per cent when the RBA began raising rates in May 2022.
Dr Ellis noted that while the RBA was focused on inflation risks now, it “could be surprised in 2026 by the gradual labour market softening”.
Current interest rate settings, still well above the so-called neutral rate that neither stimulates nor restrains the economy, may eventually inflict enough pain to warrant further cuts next year.
But for now, any relief for mortgage holders is firmly on ice.
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