Why Aussie borrowers will have to wait for rate cuts as inflation falls
Australian borrowers may have to wait longer for mortgage rate relief due to major changes at the Reserve Bank, even as inflation has fallen to a two-year low.
The official monthly consumer price index for January showed headline inflation growing at an annual rate of 3.4 percent – the lowest level since late 2021.
The monthly indicator showed inflation was only marginally above the Reserve Bank’s 2 to 3 percent target.
Prices for meat and seafood fell 2 percent over the year, but prices for bread and grains rose 7.4 percent, according to Australian Bureau of Statistics figures released on Wednesday.
Even if overall inflation falls faster than the RBA expects, borrowers may have to wait longer for future rate cuts and lighter monthly mortgage payments.
Australian borrowers may have to wait longer for interest rate cuts due to major changes at the Reserve Bank – even as inflation has fallen to its lowest level in two years (pictured is a Woolworths shopper in Sydney)
That’s because the Reserve Bank will meet eight times in 2024 – down from the previous 11 – under Treasurer Jim Chalmers’ big changes.
With longer breaks between meetings, AMP economists My Bui and Diana Mousina said the Reserve Bank would be concerned if consumers started expecting interest rate cuts soon.
“The RBA is likely to maintain its preference for mild rate hikes, amid concerns that any talk of rate cuts would lead to a rise in inflation expectations and a renewed rise in inflation,” they said on Wednesday.
Like the US Federal Reserve, the RBA will also hold two-day meetings eight times a year.
But unlike the United States, Australia’s more comprehensive inflation data is published quarterly rather than monthly.
Inflation data for the March quarter will not be released until April 24 as the RBA is unlikely to ease rate cuts in May even if the figure is well below t.The December quarter annual pace of 4.1 percent.
Looking for evidence that inflation is continuing to decline, the Reserve Bank would likely wait until its August meeting, after releasing June quarter inflation data on July 31.
But because these figures are not low enough, borrowers may have to wait until the November meeting, after the September quarter inflation data is released on October 30.
The Reserve Bank does not expect inflation to fall within its target range of 2 to 3 percent until December 2025, but it could cut rates sooner to stem a serious economic slowdown.
With the elections next year, Dr. Chalmers would also become the first treasurer to give up his power to veto RBA decisions.
This mechanism has never been used since the Reserve Bank was introduced into law in 1959.
The Treasury Acts (Reserve Bank Reforms) Amendment Bill 2023 was tabled in Parliament in November last year.
Even if inflation slows faster, rate cuts could take longer as Treasurer Jim Chalmers changes the Reserve Bank’s schedule so it meets eight times a year instead of 11.
This will create a specialist monetary policy board with six external members to decide interest rates, replacing the existing RBA board arrangement that sets the cash rate.
The Senate Committee on Economic Legislation will report on March 21.
The RBA last raised rates in November, taking the cash rate to a 12-year high of 4.35 percent.
This was the thirteenth rate hike in eighteen months and marked the steepest pace of monetary policy tightening since 1989.