Interest rate warning for mortgage holders after inflation rises in Australia

Mortgage holders could have to wait another year for a much-needed rate cut, with the market and economists pushing back on forecasts of the RBA’s first rate cut due to rising inflation.

The monthly inflation gauge rose for the second month in a row, rising from 3.5 percent to 3.6 percent for the 12 months ending in April, according to the Australian Bureau of Statistics.

The 3.6 percent growth in consumer prices causes inflation to deviate further from the Reserve Bank’s target range of two percent and three percent.

Inflation rates were higher than expected, causing the futures market to push back on the prospect of a May 2025 rate cut, with relief set to be delayed until December 2025.

Betashares chief economist David Bassanese said persistent inflation numbers would test the Reserve Bank’s patience and make a rate cut before Christmas unlikely.

“There is indeed a simmering risk that the RBA may feel obliged to raise rates further to reduce inflation in those demand-sensitive areas over which it can influence,” he wrote, putting the likelihood of such a rate hike at around 30 to 40 percent estimated.

Charu Chanana, head of Saxo’s FX strategy department, said the RBA outcome could be a reason to delay rate cuts, but it is unlikely that rate hikes will be on the table again given the easing of the Australian labor market and overburdened consumers.

Still, the implied probability of an RBA rate hike in September in the money market rose from 12 percent to 20 percent after the report, according to CommSec economist Ryan Felsman.

“Traders now believe that rate cuts are off the table until at least mid-2025,” Felsman wrote.

With the Phase 3 tax cuts taking effect in just a month, the influx of extra money to millions of people has economists worried that inflation will rise even further.

But Treasurer Jim Chalmers downplayed Wednesday’s inflation figures, claiming monthly reports on price increases are less reliable than quarterly reports.

“As we have said many times, the monthly inflation indicator can be volatile and less reliable than the quarterly measure because it does not compare the same goods and services from month to month,” Chalmers said.

Meanwhile, Shadow Treasurer Angus Taylor criticized the Federal Government for increasing spending as Australians face “one of the highest and most persistent inflation rates of any advanced economy”.

The latest data from the ABS shows Australian consumers have responded to rising interest rates by cutting back on spending.

Retail spending increased by 0.1 percent in April compared to the following March a decrease of 0.4 percent in March and an increase of 0.2 percent in February.

“Underlying retail spending remains weak, with a small increase in sales in April not being enough to offset the decline in March,” said Ben Dorber, head of retail statistics at ABS.

“Since early 2024, retail sales trends have been flat as cautious consumers reduce discretionary spending.”

Clothing sales fell by 0.7 percent this month and food sales also took a big hit compared to March, which was too high due to an early Easter.

“Consumers have reined in their spending in response to a host of cost-of-living pressures, which have largely stalled retail sales growth over the past year,” said Sean Langcake, head of macroeconomic forecasting at Oxford Economics Australia. .

‘There is some help on the way for household finances from the May Budget, with tax cuts and subsidy payments set to boost cash flow from July.

‘But it’s unlikely this will be enough to completely pull consumers out of their current funk. “We expect retail sales momentum to remain subdued through 2024.”