Twelve months at 4.35%: Why the RBA holds firm despite cooling inflation
Despite the lowest inflation figures in years, the Reserve Bank of Australia (RBA) has kept its foot on the brakes. What’s holding them back?
The RBA has decided to leave the cash rate unchanged on 5 November 2024, marking a full twelve months since the Board’s last move brought the cash rate up to 4.35%. One year on, Australia’s inflation story looks vastly different.
A year spent descending from peak inflation
The last time the cash rate changed was on 7 November 2023, just days after the September quarter CPI was released by the Australian Bureau of Statistics (ABS).
Inflation had grown 1.2% over the quarter, largely driven by petrol prices, electricity, rents, and property purchases. Annual inflation was up by 5.4%, but this was a sharp decrease from the December 2022 peak of 7.8%.
While the RBA Governor, Michele Bullock, recognised that inflation had passed its peak, the Board felt it was still too high and tacked a 25 basis-point hike onto the cash rate.
Inflation drops to lowest rates in years
In November 2024, the latest September quarter CPI recorded a tiny 0.2% quarterly increase and an annual headline inflation rate of 2.8%.
ABS head of price statistics, Michelle Marquardt, says these are some of the lowest inflation outcomes we’ve seen in years.
"The September quarter’s rise of 0.2 per cent is the lowest outcome since the June 2020 quarter fall which occurred during the COVID-19 outbreak and was driven by free childcare,” Marquardt said.
“Annually, the September quarter’s rise of 2.8 per cent was down from 3.8 per cent in the June quarter. This is the lowest annual inflation rate since the March 2021 quarter.”
A mirror image of inflationary drivers
What’s causing inflation to fall now, according to Marquardt, are some of the very same goods and services that caused inflation to rise back in November 2023: electricity and automotive fuel prices. It’s like looking into a mirror.
While the most significant contributors to quarterly inflation in the September quarter 2024 were recreation and culture, and food and non-alcoholic beverage prices, the falls in electricity prices (thanks to government cost of living measures) and oil prices (thanks to lower global demand) have helped bring annual inflation down – on paper.
“The 2024-25 Commonwealth Energy Bill Relief Fund rebates in all states and territories and state government electricity rebates in Queensland, Western Australia and Tasmania led to a large fall in electricity prices this quarter.
“Without the rebates, electricity prices would have increased 0.7 per cent this quarter,” Marquardt said.
In all likelihood, that would have added a few extra basis-points to the tab.
Why the RBA is playing it safe: the trimmed mean explained
If you’ve been paying attention, then you’ll know the RBA’s target inflation range is between 2-3% per year. They often say that once inflation gets into this range, they’ll consider a cash rate cut.
While headline inflation has fallen to 2.8%, underlying inflation, also known as the ‘trimmed mean’, tells a slightly different tale.
What is trimmed mean inflation?
The trimmed mean isn’t a curmudgeon with a new haircut, rather it’s a measure of inflation that excludes extreme price movements on the high and low sides, to give us a better understanding of how inflation is trending. It’s also the number the RBA wants to see fall within their target band. View
Excluding the big drops in electricity and fuel prices recently, annual trimmed mean inflation came in at 3.5%.
However, underlying inflation does continue to ease, coming in 50 basis-points lower than the June quarter 2024 figure of 4%.
Borrowers urged to remain optimistic despite high rates
For homeowners, this means continued pressure on home loan rates. But Mozo finance expert, Rachel Wastell, urges borrowers to remain optimistic.
“With trimmed mean inflation still above target, the RBA is holding tight. If you’re a homeowner hoping for a rate cut, it’s a sign to hang in there, find ways to lighten the load, and start looking to see if you’re on the best rate you can be.
“A year-long hold after an aggressive hiking cycle is likely giving borrowers hope there is light at the end of the tunnel. But now is not the time to tune out.
“Mortgage holders should reassess their finances and gear up for what’s next, especially if they’re waiting for a potential rate cut to refinance,” Wastell said.
Economists at the Big Four banks uniformly predict the RBA will finally cut in early 2025, in February at the earliest. Time will tell.
Read last month's Reserve Bank interest rates update.
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