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Higher hopes of end to interest rate rises as inflation slips to 6 per cent

By Rachel Clun and Shane Wright

Home buyers could be spared any more mortgage pain after better-than-expected inflation figures took pressure off the Reserve Bank to continue lifting interest rates.

In figures that forced economists and financial markets to slash their expectations for additional rate rises, the Australian Bureau of Statistics revealed inflation in the 12 months to June fell to 6 per cent. As recently as December, it had been 7.8 per cent.

Inflation has fallen for two consecutive quarters.

Inflation has fallen for two consecutive quarters.Credit: AP

In the three months to the end of June, inflation rose by 0.8 per cent, the slowest quarterly rate of growth since September 2021.

The ASX lifted by 0.9 per cent after the figures were released while the Australian dollar eased against the American dollar on expectations the RBA will not use its meeting next Tuesday to lift rates. Markets now put the chance of a rate increase next week at less than 30 per cent.

Prices across a range of sectors, including health, transport and education, fell through the quarter during which the Reserve Bank took official interest rates to an 11-year high of 4.1 per cent.

The more volatile monthly measure of inflation, also released on Wednesday, confirmed the downtrend in prices. After peaking at 8.4 per cent in December, monthly inflation slipped to 5.4 per cent last month.

The figures were also better than expected by the RBA which had forecast inflation to be at 6.3 per cent by the end of June.

Economists said the figures show the Reserve’s 12 rate rises were slowing the economy, but the full impact of those increases was still yet to be felt and further tightening may not be needed.

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EY chief economist Cherelle Murphy said the data suggested the RBA could hold rates steady.

“The slowing in the quarterly rates of price growth eases pressure on the Reserve Bank to raise rates again in August, with the data suggesting that its dozen rate hikes since May 2022 are working as planned,” she said.

“But with inflation still far above the Reserve Bank’s 2-3 per cent target band, and some ongoing upside risks to wages and food prices, we are not out of the danger zone yet.”

Other economists believe there is still a chance the central bank lifts rates by a quarter percentage point next week. Commonwealth Bank economists expect the Reserve Bank to lift interest rates one last time on August 1, to 4.35 per cent.

But Deloitte Access Economics partner Stephen Smith said the inflation figures were further evidence the RBA had lifted interest rates too high.

“A lot of the inflation in Australia today has been supply-side driven on the back of COVID. And now that that has washed through the system, we’re seeing inflation quite quickly return to more normal levels,” he said.

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While annual services inflation was at a near 15-year high of 6.3 per cent, Smith said that was a distraction, and the quarterly data showed services inflation was falling quickly – from 2.1 per cent in the December quarter to 1.7 per cent in March and 0.8 per cent in June.

Rental inflation was also at highs not seen for years. On a quarterly basis, rents had risen to the highest level since 1988. Smith said that was further proof that lingering inflation pressures were largely problems the Reserve Bank could not fix with higher interest rates.

“The rental challenge, the challenge around housing is about boosting supply, and increasing interest rates actually work against that,” he said.

“So those are the reasons why we think the RBA has gone too far and really tried to attack demand when the issue has been on the supply side.”

Treasurer Jim Chalmers described the figures as pleasing, adding bringing inflation under control remained the government’s main focus.

“Whether it’s getting the budget in much better nick, providing cost-of-living help without adding to inflation, or investing in the supply side of our economy – these are the three most important things you can do in the context of high inflation,” he said.

But shadow treasurer Angus Taylor said the government needed to do more to help get inflation back down to the RBA’s target range.

“We’ve learnt through history if you leave the entire job to the Reserve Bank, it’s painful,” he said.

“The test for the government is whether they are going to treat fighting inflation as their first, second or third priority.”

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During the past three months, the biggest price increase was for household textiles which jumped by 9.5 per cent. International travel and accommodation prices lifted by 6.2 per cent, insurance costs gained 5.3 per cent while bread rose another 5.2 per cent.

Insurance costs have surged by 14.2 per cent over the past year as insurers push up the prices for home, contents and vehicle products. In Brisbane, insurance costs have jumped by 17.1 per cent. Bread prices nationally have risen by 14 per cent, the fastest rate on record.

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Original URL: https://www.watoday.com.au/link/follow-20170101-p5dra8