The Reserve Bank (RBA) is expected to keep interest rates on hold despite inflation falling within the target range.
New data showed Australia’s annual inflation rate at 2.8% — the lowest in three-and-a-half years. ABS reported a minor 0.2% increase for the recent quarter, marking the smallest rise since early 2021.
Although the inflation rate is moving in the right direction, experts suggest that an interest rate cut by the RBA may not come until early 2025.
Economist Peter Esho (pictured above left), founder of Esho Capital, credits government interventions for the inflation drop. He highlighted the impact of energy subsidies, which have temporarily lowered costs.
“We’ve seen the direct impact of energy subsidies, worth around $3 billion, helping bring down the inflation rate,” Esho said.
With an election year approaching, he suggested that the government may extend these subsidies to keep inflation stable.
The growth in public sector employment since the pandemic also plays a key role in Australia’s economic landscape.
Esho noted the government is unlikely to reduce the public workforce leading up to an election, thereby sustaining one of the employment market's key supports.
While the inflation rate is improving, costs for housing, including rent and construction, remain high.
REA Group senior economist Eleanor Creagh (pictured above centre) said that persistent demand pressures in the housing sector are keeping rents and new dwelling costs elevated, despite some easing of inflation.
This trend is also evident in council rates, which surged by 4.9% — the most significant increase in a decade.
“The residential construction industry has been challenged by capacity constraints and higher costs,” Creagh said.
Deloitte Access Economics noted that although falling inflation and anticipated rate cuts will help ease household budgets, some states, particularly those with larger mortgages like New South Wales and Victoria, will benefit more than others.
Lower interest rates are expected to stimulate consumer spending but may also hit states reliant on commodity exports.
Despite positive inflation data, RBA is not expected to cut rates before next year.
Creagh stressed that, while inflation has moderated, underlying inflation remains high.
“Short of substantially higher unemployment or lower underlying inflation, RBA is likely to remain on hold as the board looks to sustainably return inflation to the target range,” she said.
Governor Michele Bullock and other RBA officials are closely watching quarterly figures, underscoring that broader economic pressures may delay a rate reduction until 2025.
Meanwhile, banks have started cutting fixed-rate mortgage products, a sign of easing conditions but with no guarantee of immediate RBA action.
Bell Partners Finance managing director Mark Stevenson (pictured above right) said that while New Zealand and other Western nations are lowering rates, Australia’s strong employment rate supports RBA’s cautious approach.
“While the mood for a rate cut is intensifying, it seems more likely the RBA may keep mortgage holders waiting until next year,” Stevenson said.
As the holiday season approaches, consumer spending patterns will influence RBA’s decision. Retail events like Black Friday and Christmas could reveal whether inflation and government measures can sustainably control demand pressures.
“Upcoming retail events … present prime opportunities for elevated spending towards the end of the year,” RSM Australia economist Devika Shivadekar said.
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