Inflation has finally dropped below 3% after three long years.
In August 2024, the monthly consumer price index (CPI) indicator was 2.7%, according to the Australian Bureau of Statistics (ABS), compared to 3.5% the month before.
This is a welcome relief for many households and businesses that have felt the sting of higher living costs, particularly throughout 2022 and 2023.
The Reserve Bank of Australia (RBA) has indicated that it will likely cut interest rates when inflation is back within its target range of 2-3%.
Sadly, though, an immediate rate cut is unlikely.
That’s because the RBA prefers to use the quarterly CPI results as its measure of inflation, and not monthly data (as the quarterly results rely on a larger data set and are therefore regarded as more reliable). It is the quarterly results that the RBA has said it would like to see “sustainably” within the target range before any major monetary policy decisions are made.
Moreover, just because inflation has touched below 3% on a single monthly reading doesn’t mean inflation is set to stay below that benchmark. The bank wants to see inflation well within the target for a longer period before making any decisions to cut the official interest rate. A one-off dip won’t be enough for the RBA to consider the job done.
The inflation outlook
While the latest monthly inflation data shows the CPI was 2.7% in August, the latest quarterly inflation data show it was 3.8% in the June 2024 quarter, up from 3.6% in the March quarter.
While the RBA expects headline inflation to dip below 3% in the near term due to government cost-of-living measures, underlying inflation is projected to remain elevated for a more extended period.
Given this, the RBA adjusted its forecasts in its August Statement on Monetary Policy to reflect that quarterly inflation is now expected to return to target slightly later than originally forecast – by the June 2025 quarter.
The inflation outlook is influenced by several key factors. Domestic cost pressures, from strong growth in both labour and non-labour inputs, have contributed to persistent inflation. Services inflation is expected to decline more gradually than goods inflation, reflecting ongoing domestic cost pressures and moderating demand.
Housing inflation is likely to remain elevated. This is due to both capacity and material constraints in the construction sector and shortages of skilled workers.
While global supply chain disruptions have eased, risks such as potential increases in shipping costs continue to be a concern, which could also impact the inflation outlook.
When will the official interest rate be cut?
As a result of this inflation news, the RBA has forecast that official rate cuts are likely to begin in 2025, with the cash rate (currently at 4.35%) reaching 4.0% by June 2025. It will then continue to decline, hitting 3.6% by the end of next year and 3.3% by the end of 2026.
This gradual reduction highlights the central bank’s caution, particularly as it looks to avoid any chance of new increases in inflation.
Many economists agree with the RBA’s predictions. Out of the big four banks, only the Commonwealth Bank has forecast a rate cut in 2024. ANZ, NAB and Westpac agree the first cut is likely in February 2025.
The Australian Stock Exchange’s (ASX) cash rate tracker predicts four cuts in 2025, with the first in February.
The RBA has stated that while inflation is moving in the right direction, it wants to ensure that the economy stabilises without cutting interest rates too early. Factors such as global economic conditions, domestic labour market dynamics and consumer spending patterns will continue to influence the central bank’s decision-making.
What does this mean for mortgage holders?
For existing mortgage holders, the prospect of a rate cut will directly influence your decisions about refinancing. With inflation declining, you might be hopeful that rates will fall quickly, making refinancing options more attractive.
But, the RBA’s slow and cautious approach means that any decisions about your current mortgage must take into account an environment of higher interest rates, at least for the foreseeable future.
For borrowers with fixed-rate home loans, your refinancing options will depend on your loan’s specific rate and term. It’s worth talking to a mortgage broker to get tailored advice on your situation.
For variable-rate mortgages, the outlook is slightly different. Variable interest rates fluctuate with the cash rate, and while there’s little expectation of rate cuts in 2024, borrowers may still benefit from shopping around for better deals.
Both fixed and variable mortgage holders may be able to benefit from increased competition among lenders. Lenders often vie for new business by offering competitive rates or incentives for refinancing. Even with the cash rate set to remain higher for longer, pricing variations between lenders could save borrowers on their monthly repayments.
Get professional advice
In light of the RBA’s cautious approach, borrowers need to approach refinancing with careful consideration of the long-term impacts. Keep in mind your circumstances and consult with a mortgage broker to make informed decisions about your home loan. A mortgage broker can help you assess your options, compare different lenders and identify any potential savings.
Ready to learn more about your refinancing options? Call Shore Financial on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.