Interest rates nearing a peak as inflation slows

The inflation rate of 5.6 per cent in the year to May was sharply down on the 6.8 per cent consumer price index rise in April, the 6.3 per cent increase in March and below what market pundits were anticipating. It also was the lowest rise for more than a year, since April last year. For those reasons the Reserve Bank of Australia board should look seriously at offering borrowers a break by leaving interest rates at current levels when it meets next week. After 12 rate hikes across the past year, Thursday’s retail trade figures and job vacancies data also will influence the board’s decision. As KPMG chief economist Brendan Rynne said, the unexpectedly large fall in inflation pointed to the fact the peak in interest rates was near and there was a higher chance the RBA board would pause next Tuesday. But “with an extremely tight labour market and the balance of risks tilted to the upside, the consideration of another rate rise remains on the table in the coming RBA meetings”.

While Jim Chalmers predicted on Wednesday that inflation would “stay higher than we’d like for longer than we like”, the data suggests the RBA’s interest rate strategy is working. Inflation of 5.6 per cent, while still double the central bank’s target range, is more encouraging than the 7.8 per cent CPI rise recorded across the year to December. It will be welcome news for home buyers and small businesses struggling to deal with soaring loan repayments. The improvement also should prompt trade unions to think twice about the growing number of wage pushes in the vicinity of 7 per cent a year or more.

As RBA governor Philip Lowe has pointed out consistently in recent months, wage claims above inflation, not backed by productivity improvements, will only prolong the current inflationary cycle, extending the economic difficulties of those struggling with higher repayments.

Economists had anticipated inflation to decelerate to about 6 per cent as a result of lower fuel and travel costs. Australian Bureau of Statistics figures show the major contributors to the annual inflation rate were housing, up 8.4 per cent, and food and non-alcoholic beverages, up 7.9 per cent. The rise in the costs of automotive fuel, travel and accommodation slowed down. But as economics correspondent Patrick Commins writes, some of the ABS details make painful reading. That was especially applicable to power bills, which increased by 14 per cent. Federal and state governments anticipate further rises in the new financial year as energy policies take effect. But even if household power bills are offset by cost-of-living relief measures, these will impose a growing burden on taxpayers.

Amid growing fears in some quarters about a possible recession because of rising interest rates, the Treasurer had some positive news on Tuesday. In an address to the Property Council of Australia in Darwin, Dr Chalmers revealed the $4.2bn surplus forecast in the budget for 2022-23 would be higher because of stronger commodity prices, higher tax revenue and a strong labour market putting the economy in a significantly better position than forecast.

The government sensibly is returning the bulk of revenue upgrades to the budget bottom line. This will be important to reduce debt and government interest repayments on debt, to fund spending increases in defence and the care economy, and to better prepare the nation for a further financial or health crisis. On the downside, Dr Chalmers said the tightening of monetary policy and global factors would slow the growth of the economy from 3.25 per cent this year to 1.5 per cent next year. In the medium term, however, evidence that interest rate rises have taken the heat out of inflation will ­work in favour of householders and business as the need for further RBA increases diminishes.