Australia's Latest Inflation Figures Dash Hopes of Rate Cuts, Impacting Mortgage Holders

Australia's latest quarterly inflation figures have come in higher than expected, negatively impacting mortgage holders and reducing the likelihood of interest rate cuts in the near future. The Consumer Price Index (CPI) rose 1% in the March quarter, exceeding forecasts and marking an acceleration from the 0.6% rise in the previous quarter. Over the year, the annual inflation rate moderated to 3.6%, down from 4.1% in December 2023, but still above the Reserve Bank of Australia's (RBA) 2-3% inflation target.

The stronger-than-expected inflation result complicates the economic backdrop for the Albanese government's upcoming federal budget. Treasurer Jim Chalmers faces a delicate balancing act in providing cost-of-living relief for households while positioning the economy for growth and avoiding adding to inflationary pressures. The government aims for a second budget surplus to help curb inflation, but concerns remain that additional spending could drive up prices and keep interest rates elevated, further burdening households.

Housing remains one of the biggest contributors to inflation, with rental prices rising 2.1% for the quarter and median advertised asking rents up 9.1% in 12 months. Other key drivers of inflation include sharp rises in consumer durable goods prices, a resumption of strong rents inflation, and higher-than-expected price increases in health categories. While goods inflation has declined for six consecutive quarters, services inflation remains sticky, with areas like insurance, education fees, and meals out seeing significant increases.

Why this matters: The hotter-than-expected inflation data reduces the likelihood of interest rate cuts starting before late 2024 or early 2025, prolonging the financial strain on mortgage holders. The RBA faces the challenge of balancing the need to bring inflation back to the target range while considering factors such as a strong job market, upcoming personal income tax cuts, and persistent price pressures in certain sectors.

Economists warn that inflation is still far too high for the RBA to consider rate cuts, and the "last mile" of getting inflation back to the target range will take some time. Westpac's chief economist, Luci Ellis, formerly of the RBA, stated, "Inflation is declining but still has a way to go for the RBA to be confident of returning to the 2-3% target range." As a result, Westpac now forecasts the RBA will maintain rates in May, delaying any potential rate cuts until November at the earliest.

Key Takeaways

• Australia's Q1 inflation rose 1%, exceeding forecasts, annual rate at 3.6%.
• Stronger inflation complicates Albanese govt's budget, risks adding to price pressures.
• Housing, consumer durables, and services inflation remain key drivers of high prices.
• Likelihood of RBA rate cuts reduced, with cuts unlikely before late 2024 or 2025.
• Economists warn inflation is still too high for RBA to consider rate cuts soon.