Yahoo Finance Only way struggling Aussies will get an interest rate cut this year
Cost of living remains front of mind for many Australians, so does this inflation drop mean you will find some relief?
Inflation has been the big bad wolf in the cost-of-living crisis. It's the creep in prices at the supermarket or while trying to keep a roof over our heads, be it rent or the mortgage.
The Reserve Bank of Australia (RBA) has continued to reiterate that raising or dropping the cash rate is a "blunt tool" in this fight. Michele Bullock has repeatedly used her post-decision press conferences to point out that it is inflation, not just interest rates hurting Australians' finances.
So now it's tracking down, will we get relief?
The latest data from the Australian Bureau of Statistics (ABS) found the annual rate of headline inflation fell to 3.5 per cent in July, down from 3.8 per cent in June.
Trimmed mean inflation which "smooths out the impact of temporary or irregular price changes" was also down to 3.8 per cent from 4.1 per cent in the 12 months to June.
That's a significant drop from the three-decade high of 8.4 per cent at the end of 2022, but still a way to go before hitting the RBA's target of 2 to 3 per cent.
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Housing - like rent and building costs - remained a driver of high inflation, while electricity prices were found to have fallen to 5.1 per cent.
This is due to energy rebates, like the first installment of the federal government's, and state-specific ones like the $1000 handout in Queensland.'
However, the ABS estimated that electricity prices in July would have risen 0.9 per cent if the impacts of the rebates were stripped away.
Economist Harry Murphy Cruise, from Moody’s Analytics, warned the drop in electricity prices was "smoke and mirrors" that could end up hurting Australia's fight against inflation.
"Where we’ll end up all depends on what households do with the savings," he said.
"If they’re used to get ahead on mortgage repayments or top up rainy day funds then the government will be successful in lowering inflation at the same time as providing cost-of-living relief.
"On the other hand, if the savings are spent through the economy, the RBA’s fight against inflation will get a whole lot harder."
Murphy Cruise predicted Australia landing "somewhere in between, but closer to the latter", with underlying inflation to remain elevated at 3.5 per cent, and above the RBA's target rate, this year.
"Especially when the rebates are combined with tax cuts already hitting bank accounts," he said.
"That’ll keep interest rates at their 12-year high until early next year."
When will interest rates go down?
Sally Tindall, Canstar’s Data Insights Director, said inflation was moving in the "right direction" but was "certainly not a green light to start cutting rates" as the RBA's "wait and see" strategy appeared to be working.
"While many central banks have already begun lowering official rates, or in the case of the US Fed, gearing up to do so, it's important to remember that Australia is running on a similar but different track," Tindall said.
“Our sensitivity to cash rate changes is one key reason for this."
"The majority of Australian borrowers are on variable rates, and, thanks to sky-high property prices, in many cases, are carrying around supersized debts.
“This is one of the key reasons why the Reserve Bank didn’t hike the cash rate as high as other central banks, but also why, when it does finally start cutting, it will have a more immediate impact on households.
Warren Hogan, chief economist with Judo Bank, who has called for multiple interest rate hikes this year said inflation had been temporarily propped up by government intervention and was not hopeful for mortgage relief any time soon.
“I think the only way they’re going to get a rate cut in this year is if something completely out of left field happens.”
While both inflation measures remain above the RBA’s target range of 2 to 3 per cent, interest rate markets are tipping a pre-Christmas cash rate cut of up to 30 basis points by the end of the year.
When do the big four banks think interest rates will drop?
Commonwealth Bank: November 2024
Westpac: February 2025
ANZ: February 2025
NAB: May 2025
The difference in outcomes would be huge for mortgage holders.
Canstar has done an analysis based on a $600,000 loan with 25 years remaining.
Impact of Cash Rate Forecasts | |||
Cash Rate Forecast | Drop in Monthly Repayments by June 2026 | Interest Saved by June 2026 | |
ANZ | 3 x 0.25% cuts starting Feb-25 | $269 | $4,810 |
CBA | 5 x 0.25% cuts starting Nov-24 | $443 | $8,139 |
NAB | 5 x 0.25% cuts starting May-25 | $437 | $4,413 |
Westpac | 4 x 0.25% cuts starting Feb-25 | $355 | $5,783 |
'Subtle signs': Experts quick take on interest rate cut hopes
Here is a quick glimpse at what some other experts are saying, which could give you a better idea of what to expect:
Josh Gilbert, Market Analyst at eToro
"Although this reading isn’t necessarily a reason to panic and shows that inflation is abating, it highlights that the easing of monetary policy isn’t likely to happen in the short term."
Luke Fossett, General Manager at GoCardless ANZ
"Today’s indication that we are now heading for a rate cut – along with the positive impact of recent stage 3 tax cuts, bodes well for small retailers and businesses providing discretionary goods and services. Relief for consumers ultimately means better times for businesses."
Diana Mousina, Deputy Chief Economist, AMP
"For the Reserve Bank of Australia, the inflation data is consistent with rates being on hold for now. Inflation is still too high (for now) to consider a reduction in interest rates but equally there is no need for rate hikes.
"While the market is pricing in a rate cut by the end of this year from the RBA (which is mostly driven by expectations for US interest rate cuts), we think the first 0.25 per cent cut will come in February, with the cash rate decline to 4.1 per cent from 4.35 per cent."
CreditorWatch comments, Anneke Thompson, Chief Economist
"There are many subtle signs of growing distress among mortgage holders and businesses in Australia.
"House listings are rising dramatically, particularly in wealthier areas of Sydney and Melbourne, and the average value of invoices held by businesses is half that of what it was this time last year, according to CreditorWatch’s July BRI.
"The unemployment rate will be watched closely now by the RBA, and any indication that it is rising faster than its forecast may give it the impetus to follow overseas central banks and cut the cash rate before the year is out."
Inflation state of play: What's getting more expensive in Australia?
The monthly consumer price index for the 12 months to July was 3.5 per cent.
This is the lowest result since March 2024.
What were the biggest price rises?
Housing up 4.0 per cent
Food and non-alcoholic beverages up 3.8 per cent
Alcohol and tobacco up 7.2 per cent
Transport up 3.4 per cent
While both inflation measures remain above the RBA’s target range of 2 to 3 per cent, interest rate markets are tipping a pre-Christmas cash rate cut of up to 30 basis points by the end of the year.
The RBA board will meet again on September 23, with a decision on the cash rate handed down on the 24th.
