Early gift for mortgage holders as inflation drops to 4.9pc

The sharper than expected deceleration in inflation to 4.9 per cent in October suggests a pre-Christmas Reserve Bank rate hike next week is off the cards.

A surprisingly sharp drop in inflation has taken a pre-Christmas rate hike off the cards, with the OECD predicting interest rates will begin to fall from the middle of next year.

Inflation in the year to October came in at a lower-than-expected 4.9 per cent and well below the 5.6 per cent rate in the month before, thanks to an increase in commonwealth rent assistance, falling petrol prices, and cheaper inter­national airfares and holidays.

The Australian Bureau of Statistics figures present hope for struggling mortgage holders after the Reserve Bank hiked the cash rate to 4.35 per cent on Melbourne Cup Day, with governor Michele Bullock signalling the bank was prepared to move again to bring inflation to between 2-3 per cent. As Labor MPs push for expanded targeted relief for millions more Australians and an overhaul of stage three tax cuts due to begin from July 1 next year, Anthony Albanese in question time said inflation was “heading in the right direction”, even if it was not falling “as quickly as we would like”.

“The measures we have put in place are having an impact. We are making a difference (by) getting costs down for families, with cheaper medicines, cheaper childcare, energy bill relief,” the Prime Minister said.

Pushed by the opposition to recommit to implementing the tax cuts as legislated from mid-2024, Mr Albanese said “we haven’t changed our position on the stage-three tax cuts at all”.

Delivering the annual Gough Whitlam Oration on Wednesday in Canberra, the Prime Minister said the government must deal with immediate challenges, including the No.1 priority of “relieving the pressure on families”, while also pursuing reforms to lay the foundation for “lasting change”.

To be successful, Mr Albanese said, Labor had to “engage with the urgent responsibilities of getting costs down for families”.

Treasurer Jim Chalmers during Question Time at Parliament House.

He also is putting the focus on “getting wages up for workers and getting the budget onto a stronger foundation while planning and building for an economy, an energy grid, a workforce, a health system and a region that will look fundamentally different in the decades ahead”, according to a copy if his speech.

But with the government being criticised for holding an Indigenous voice referendum during a cost-of-living crunch, Mr Albanese said the government would not be dissuaded from tackling ­reforms that would change Australia in the long-term.

“A responsible and reforming government can’t treat these as alternating tasks – or sequential ones. You have to embrace both and manage both,” he said.

He outlined four priorities for the government: relieving the pressure on families; strengthening Medicare; “a future made in Australia”; and “securing our home and our place in the world”.

With Mr Albanese committing to “continue to do everything we responsibly can to support people who are under pressure”, the OECD’s latest economic outlook projected that interest rates in Australia had already peaked. It was more optimistic on the inflation outlook than the RBA, predicting consumer price growth would slow the top of the RBA’s 2-3 per cent target band by early 2025, rather than the central bank’s forecast for late that year.

The Paris-based organisation forecast the 13 rate rises already delivered would be enough to guide the economy to a soft landing. Growth was expected to slow from 1.9 per cent this year, to 1.4 per cent in 2024 – substantially slower than the RBA’s recently upgraded 2 per cent forecast.

The OECD estimated that economic growth would pick up to 2.1 per cent in 2025, again below the RBA forecast of 2.4 per cent in that year. “More persistent inflationary pressures or a sharper slowdown in China than expected pose downside risks to GDP growth,” the report stated.

Economists warned, however, that the encouraging October inflation report did not include many services, where price growth is proving stickier than in goods, and that a February rate rise remained possible.

Investors had priced in a slim chance of back-to-back RBA hikes before the latest inflation report, and Betashares chief economist David Bassanese said soft retail figures on Tuesday followed by the latest inflation report had whittled the possibility of a ­December rise to near zero.

“In the space of two days, we’ve received reassuring news that both consumer spending and inflation continue to ease, which should obviate the need for the RBA to dampen Christmas cheer with another rate increase next week,” Mr Bassanese said.

Investors trimmed the chance of a rate hike by February from 45 per cent, to 32 per cent, according to NAB. Beyond the upbeat headline figure, the less volatile measure of core inflation – which “trims” off the largest price moves at either end – fell more modestly to 5.3 per cent in the year to October, from 5.4 per cent the month before. EY chief economist Cherelle Murphy said “it’s clear the 13 rate hikes are working; what is less clear, is whether inflation is falling fast enough”.

“It’s likely that the Reserve Bank will leave the 4.35 per cent cash rate on hold when the board meets next week. But the data over summer will be most important for the Reserve Bank’s next move in February,” Ms Murphy said. That data includes the December quarter inflation report in late January.

The October monthly inflation report showed that government subsidies continued to take the heat out of some of the hottest price rises in some essentials.

Rent inflation eased from 7.6 per cent to 6.6 per cent in the year to October (and was down 0.4 per cent in the month), but without additional commonwealth rent assistance would have been 8.3 per cent up, the ABS said.

Similarly, electricity prices were 8.4 per cent higher in the latest figures, rather than the 19.7 per cent jump were it not for federal-state energy bill rebates for eligible households.

There was good news for motorists, with fuel prices falling by 2.9 per cent in the month, to be up 8.6 per cent on a year earlier.

RBA governor Michele Bullock said on Tuesday that despite the “noise” generated by the public and politicians after 13 rate hikes, that “households and businesses in Australia are actually in a pretty good position”.

Ms Bullock has said that the drivers of higher inflation are now “homegrown”, rather than coming from overseas developments.