31 January 2024

Borrowers have received the strongest indication yet that the Reserve Bank’s rate hiking cycle is over, with eyes now turning to the timing of the first cut.

Wednesday’s highly anticipated inflation data showed a sharp slowdown in the Consumer Price Index (CPI) during the December quarter, with prices rising 0.6% over the three months according to the Australian Bureau of Statistics, much slower than the 1.2% gain recorded in September.

That takes the annual rate of inflation to 4.1% - its lowest level in two years - down from 5.4% annually in the September quarter and well below the RBA’s forecast of 4.5%.

Inflation peaked at 7.8% annually in December 2022.
Trimmed mean inflation – which strips out more volatile price changes – softened to 4.2%, down from 5.1% in the September quarter.

Over the quarter, the biggest contributors to inflation were housing - encompassing new construction, rents and utilities - as well as alcohol and tobacco, insurance and financial services, and food.

ABS head of prices statistics Michelle Marquardt said higher labour and material costs contributed to price rises this quarter for construction of new dwellings.

"The 1.5% increase [in new housing costs] is slightly higher than the 1.3% rise in September 2023 quarter,” Ms Marquardt said.

“The increase in insurance was due to higher premiums across motor vehicle, house and home contents insurance.

"Over the past twelve months, insurance rose 16.2%, making it the largest annual rise since March 2001."
PropTrack senior economist Paul Ryan said rent inflation remains extremely high, having risen 7.3% over the year.

"Measured rent increases would have been even larger if Commonwealth Rent Assistance had not increased," Mr Ryan said.

"It shows just how tough the rental market is, which PropTrack data on advertised rents has been showing for some time."

Data from PropTrack this week revealed national rent prices have surged by a third in the past two years.

But Mr Ryan said financial pressures look to be easing in 2024, with slowing price growth, expectations of lower interest rates, and a slower pace of rental increases.

"This will be welcome news for households feeling cost-of-living pressure."

It comes a day after retail trade data showed a sharp pullback in Christmas spending, with sales falling 2.7% in December.
While the Black Friday sales event in November may have spurred shoppers to bring forward their spending, the December fall more than offset the previous month’s 1.6% gain and paints an ‘unambiguously weak’ picture, according to Westpac senior economist Matthew Hassan.

“While a pullback was expected, the consensus forecast was for a milder 2% decline,” Mr Hassan said.

“Annual sales growth slowed to just 0.8%, an extremely weak pace given price and population growth.”

Slowdown signals rate cuts are on the horizon

The string of soft data all but confirms the RBA will remain on hold next week when it meets for the first time this year.

Financial markets are pricing in almost no chance of an interest rate hike in February, with the first cut projected for September.

Economists at the major banks also expect the RBA’s next direction will be down, with CBA and Westpac forecasting the first cut in September, while NAB and ANZ anticipate the first move in November.

Beyond this year, interest rate forecasts widen with the big four banks seeing the cash rate sitting between 2.85% and 3.6% by the end of 2025.

But AMP chief economist Shane Oliver said slowing inflation could force the RBA to cut rates as early as June, with the cash rate expected to fall to 3.6% by the end of this year.

“The sharper than expected fall in inflation recently means that the RBA’s inflation forecasts are looking too hawkish,” Mr Oliver said.

While noting near term risks around global shipping supplies in the Red Sea, Mr Oliver said assuming they are resolved inflation is projected to reach the top end of the RBA’s 2-3% inflation target by the end of 2024 – a year earlier than the RBA is currently projecting.

“But with shorter term inflation momentum falling and growth weak the RBA, and other central banks, shouldn’t have to wait for inflation as measured on a 12-month ended basis to be back at target before starting to cut rates,” he said. “We expect the RBA to start cutting around June with four cuts this year.”

What that means for borrowers

With the bulk of Covid-era fixed-rate borrowers having rolled off their fixed term loans, households have seen a steep increase in mortgage repayments.

Since the first hike in May 2022, the RBA has raised the cash rate 13 times, taking it from 0.1% to 4.35% in just 18 months. A variable loan borrower with $500,000 outstanding on their mortgage has seen their repayments jump by almost $1,300 a month on average, or more than 60%, assuming their lender passed on each hike in full.

If the cash rate fell to 3.1% next year, as forecast by Westpac and NAB, that would free up around $411 a month for that same borrower. But with refinancing activity sitting well above pre-Covid levels, borrowers have already been seeking out greater savings.

While the sharp rise in mortgage repayments has put pressure on many households, PropTrack senior economist Eleanor Creagh said to date, there has been little evidence of a pickup in motivated selling.

“Mortgage arrears, albeit published with a lag, remain historically low and well below pre-pandemic levels,” Ms Creagh said.

“The resilience in labour market conditions and low unemployment rate has provided a safety net here and is a driver of why mortgage arrears remain historically low.

“So while many households may be feeling stressed with the spending adjustments they have made, they have continued to prioritise their repayments by reducing spending elsewhere, increasing hours worked or drawing on existing savings.”

For those unable to hold out for the projected rate cuts, Ms Creagh noted almost every household with a mortgage has the option to sell their property and repay their loan in its entirety given property prices have risen almost every month since January 2023.