Households warned rate cuts are a long way off as inflation bites
The Reserve Bank has issued a stark warning to Australian homeowners, to brace for years of high rates, with inflation not expected to ease until late 2027.
Australian homeowners could be in for a long wait for the next interest rate cuts with the Reserve Bank admitting stubborn inflation may not be back under control until well into 2027.
Melbourne Cup day brought no joy for mortgage battlers with the central bank keeping the cash rate on hold at 3.6 per cent, dashing hopes of a spring cut and piling pressure on the federal government to scale back its spending spree.
The decision, unanimously backed by the RBA’s monetary policy board, came after last week’s shock inflation spike that effectively scratched the Cup Day cut before it even left the gate.
The central bank now expects inflation to stay above 3 per cent for much of next year before easing back to target levels by late 2027, leaving future interest rate cuts uncertain.
At a press conference, Reserve Bank governor Michele Bullock was defiant about the messages the bank had sent out before last week’s shock inflation figures.
“We are aware that we may have misjudged the gap between supply and demand in the economy in either direction,” she said.
“If you take the forecasts at face value that would suggest that in 2027 we get back to 2.6 which is close-ish to 2.5. So on the one hand you could argue that that’s about where we want to be. The bottom line though is we know forecasts are very uncertain and the further out you go the more uncertain they are.”
Economists say mortgage holders will likely wait until February as the RBA battles with a stubborn inflation rate driven partly by strong government demand.
“The RBA has delivered a clear message to Australian households today,” Griffith University Adjunct Associate Professor Graeme Hughes said.
“Any market hopes for a cut were extinguished by the recent high inflation figures, forcing Governor Michele Bullock and the board to maintain a vigilant stance. Worryingly, the RBA itself forecasts inflation will creep above 3 per cent before only gradually easing toward 2.6 per cent by 2027. This means homeowners must prepare for the cash rate to stay put for the foreseeable future.
“Adding to the pressure is Canberra’s spending. The central bank noted that strong Federal Government public demand on everything from infrastructure to services, is currently heating up the economy. This government spending is contributing to high aggregate demand, effectively working against the RBA’s efforts to bring rising prices under control.”
KPMG Australia chief economist Dr Brendan Rynne added ‘over the past 18 months, public sector expenditure has grown significantly, however when considered in combination with private sector expenditure, aggregate demand has been following trend.”
“The Reserve Bank won’t have another live meeting until early 2026. The inflation shock that we have just experienced for the September quarter has pushed the RBA into a ‘wait and see’ approach, at least in the immediate term,” he said.
“We move to a new monthly inflation report from the ABS in November. We think it may take the RBA some time to understand the data transition, in terms of its information set for decision making.”
Creditorwatch chief economist Ivan Colhoun said the jobless rate would have to rise in order to justify further rate cuts.
He said there was still some hope of some rate reductions.
“(There is the) possibility of some further modest reduction in interest rates if inflation moderates as forecast and growth remains modest,” he said.
”(But) the next move in interest rates could be a rate rise if the RBA’s forecasts prove incorrect and core inflation does not moderate as forecast and instead continues to print at 3 per cent or above rates.”
Mr Colhoun said the cause of the inflation could be traced back to the pandemic.
“Many economists argue that government spending has made the RBA’s task of controlling inflation more difficult. In theory, any additional government spending adds to aggregate demand,” he said.
“However, some of the recent government spending has been cost of living relief which has lowered measured inflation.
“My perspective is the main sources of recent inflation are sourced in the pandemic – both exceptionally low interest rates and significant government support for the economy, together with associated supply chain problems.
“These were reasonable policy responses at a time of great uncertainty, but contributed strongly to the inflation outbreak, which of course was a global event.
“Very high energy costs and wage increases well in excess of productivity growth have also been important factors in an Australian context.
“High energy prices reflect both Coalition and Labor energy policies.”
Deloitte Access Economics partner Stephen Smith said the RBA faced “a conundrum” of rising joblessness and stubborn prices, calling on the federal government to review its policy settings.
“At 3.6 per cent, interest rates are still weighing on economic growth, while the broadbased nature of the inflation uptick suggests the supply capacity of the economy is not keeping pace with demand,” he said.
“The Reserve Bank therefore needs help from government policy … to boost productivity and investment.”
The Treasurer, Jim Chalmers, highlighted Australia’s performance against other economies.
“In the face of substantial global economic uncertainty, Australians have made remarkable progress together in the economy.”
“We’ve managed to get inflation down while keeping unemployment low and the economy has continued to grow, with the private sector having resumed its rightful place as the key driver of growth.”
“Since Labor was elected, inflation is down, debt is down, real wages are growing, unemployment is low, and interest rates have fallen.”
For now, the message from the RBA is clear that inflation, not homeowners, will continue to call the shots.
More Coverage
Originally published as Households warned rate cuts are a long way off as inflation bites
Why Daikin’s new $28m Sydney factory is a game changer
