CPI inflation numbers good news for many, but not a done deal

Inflation’s impact on Reserve Bank interest rate decisions is huge, and its new numbers deliver borrowers and businesses some hope.

Borrowers can breathe easier after the latest batch of Consumer Price Index data suggests the Reserve Bank of Australia looks unlikely to lift its cash rate further beyond its current 4.35 per cent.

The monthly CPI numbers from the Bureau of Statistics show annual inflation steady at 3.4 per cent – below economists’ expectations of 3.6 per cent.

That’s still above the RBA’s target range for inflation of 2-3 per cent, but if we look at recent CPI data on an annualised basis, we’re already there.

Over the last three months, the rise has totalled 0.7 per cent. Multiply that by four to get 12 months and it’s running at 2.8 per cent.

Over the last six months the rise was 1.5 per cent. Double that and it’s 3 per cent – at the top of the RBA range. On some measures, economists say annualised inflation is already just 2.4 per cent.

RBA governor Michele Bullock has been talking tough about potential rate rises. Picture: NCA NewsWire / Martin Ollman

However, several say core inflation is still too high and these monthly figures do not include all of the services inflation measures that worry the RBA.

Talk of RBA rate cuts before June has all but disappeared in recent weeks, but many forecasters still expect one or two cuts in the second half of the year.

The good news for borrowers – and bad news for savers enjoying high bank deposit interest rates – is that our steady fall in inflation appears orderly.

We’re in better shape than our neighbours New Zealand, where annual inflation is still running at 4.7 per cent and its Reserve Bank has a cash rate of 5.5 per cent – way above our 4.35 per cent rate.

Across the ditch on Wednesday, the RBNZ kept its official rate on hold but warned that it “needs to remain at a restrictive level for a sustained period of time”. The RBNZ statement sounded similar to Australia in some ways, with high population growth putting upward pressure on rents there, too.

Back home, borrowers stung by mortgage stress and huge cost-of-living increases are hoping that new RBA governor Michele Bullock’s recent tough talk about more rate rises remains just that – talk – and that cuts will come soon.

The RBNZ also recently talked tough, warning of another potential rise, yet it sat on its hands this week.

Canstar says Australia’s 13 RBA rate rises since May 2022 have pushed repayments on a $600,000 mortgage up 62 per cent, from $2523 to $4085. But when the first cut comes, if it’s a typical 0.25 of a percentage point reduction, it will immediately knock $101 a month off those home loan repayments.

That will be welcome, but it’s not a done deal.

CreditorWatch chief economist Anneke Thompson says the RBA “will need to see more significant easing in monthly inflation before it even beings to consider a cut to the cash rate”.

CommSec’s Craig James says financial markets are implying a 60 per cent chance of an RBA rate cut in August, but warns the latest monthly inflation figures do not include “sticky” services prices such as restaurant meals, hairdressing, vehicle maintenance and insurance.

BetaShares chief economist David Bassanese says the new numbers reduce the risk of the RBA rising.

“The CPI result remains consistent with my view that the RBA will have capacity to cut interest rates at least twice in the final months of 2024,” he says.