Borrowers are set to be denied a rate cut next week after crucial data confirmed underlying inflation has surged back up.
The Consumer Price Index for the September quarter contains both a headline inflation figure and a more substantial trimmed mean number that the Reserve Bank relies on to make its cash rate decisions.
Coming in at 3.0%, the trimmed mean number is right at the top end of the bank’s 2-3% target range. It’s the highest level seen all year ahead of 2.7% for the June quarter and 2.9% for the March.
Headline inflation came in even hotter at 3.2%, firmly outside the target band and up a significant 1.3% in the quarter.
The findings overshoot the Reserve Bank’s expectations, marking the second time in recent weeks the bank has been caught short in its forecasts of vital data.
REA Group senior economist Eleanor Creagh said the Reserve Bank now has its hands tied when it comes to giving borrowers more of the easing they were hoping for.
“A November cut is off the table. This was the definition of a material surprise, with trimmed mean inflation jumping 1.0% quarter-on-quarter and lifting annual core back to 3.0%,” she said.
REA Group senior economist Eleanor Creagh says a rate cut next week is “off the table”. Picture: supplied
“Underlying inflation pressure has broadened, and is well above the RBA’s expectations. As a result the board are likely to remain patient with further easing off the table until the core disinflation trend is re-established.”
Cash rate forecast
The bank has followed a continuous ‘cut, hold, cut hold’ pattern since it began cutting rates in February, in line with the board’s plan to slowly provide easing while keeping inflation and employment levels steady.
While the RBA has been confident in labour market conditions all year, it has continually raised concerns around how government spending, lack of productivity and stimulus in the economy and private sector stagnation could negatively impact inflation.
Importantly, the jobs market was described as “a little tight” by governor Michele Bullock in Sydney this week, signalling continued upwards pressure on workers’ wages as the bank looks to stabilise employment.
It comes after the unemployment rate jumped to 4.5% in September, above the RBA’s 4.4% forecast for the end of 2025.
Despite this, Ms Bullock was clear that the board would not be influenced by a single data set, noting the new quarterly inflation data would help shape its decision for next week.
Expectations for a cut dropped dramatically ahead of the release of the September data, plummeting from 62% on Monday to 39% by Tuesday.
RBA governor Michele Bullock dropped hints that rate cut chances were looking slim earlier this week in Sydney. Picture: Getty
The Australian Stock Exchange rate tracker also shows forecasts had been as high as 81% less than two weeks ago.
Now the inflation figures are known, Ms Creagh said the risks have shifted to less easing this cycle thanks to inflation having overshot the RBA’s expectations so significantly.
“However, the board will remain data dependent with optionality preserved for 2026,” she added.
The RBA will announce its next cash rate decision on 4 November.
This article first appeared on Mortgage Choice[1] and has been republished with permission.
References
- ^ Mortgage Choice (www.mortgagechoice.com.au)