Latest on inflation – is a rate cut in the works?

CPI was also down on the 1.2 per cent recorded across the September quarter.

As well as the fourth consecutive quarter of lower annual inflation, it’s also a far cry from the 7.8 per cent peak seen back in December 2022.

Weighing in on the data, Australian Bureau of Statistics (ABS) head of prices statistics Michelle Marquardt also noted the December CPI rise marked the smallest quarterly rise seen since the March 2021 quarter, while CoreLogic head of research Eliza Owen noted that “the December result is below the 4.5 per cent forecast made by the RBA last November”.

Inflation genie back in the bottle

According to Real Estate Institute of Australia (REIA) president Leanne Pilkington, the latest data indicates “that the RBA’s 13 rate hikes since May 2022 are slowly but surely putting the inflation genie back in the bottle”.

The ABS noted that the most significant price rises this quarter were seen in tobacco (+7 per cent), new dwelling purchase by owner-occupiers (+1.5 per cent), domestic holiday travel and accommodation (+3.9 per cent), and medical and hospital services (+1.2 per cent).

Ms Pilkington raised that “rents rose 0.9 per cent in the quarter and 7.3 per cent annually, slightly lower than the 7.6 per cent annual rise in the September 2023 quarter”.

The latest economic data follows hot on the heels of retail spending figures, which fell by 2.7 per cent in December. Noting it as the “largest December fall on record”, the president flagged that “over the past year, sales have increased by only 0.8 per cent”.

“Once population growth is taken into account, the value of sales per capita has fallen sharply over the past 12 months.”

She continued: “The lagged response to the successive interest rate hikes are showing up in the CPI and other economic data. The pointers are that we have seen the end of rate rises and if this continues home buyers can anticipate a rate reduction later this year.”

Falling faster than anticipated

Ms Pilkington is not the only property heavyweight expecting rate reductions across the coming year.

While acknowledging that inflation is still well above the Reserve Bank of Australia’s (RBA) target range of 2 to 3 per cent, Ms Owen said not only is the data moving in the right direction, but it’s “falling faster than anticipated”.

“The economic pain Australian households are feeling is working to unwind inflation, and firms up the case for interest rates to start falling some time this year,” she went on to note.

And with inflation back under control, Ms Owen also believes it could spell good news for the Australian property market.

“Housing contributes a lot to high inflation through rent paid and the cost of new dwellings, but even these indicators are moving in the right direction,” Ms Owen addressed.

“The rate of increase in rents paid is finally slowing, suggesting some hope for tenants that the rental market could turn a corner in 2024, which is also indicated by CoreLogic rent measures.”

“Easing cost-of-living pressures should help to support an improvement in consumer sentiment, which has been holding in deeply pessimistic territory since mid-2022.”

Flagging high cost-of-living pressures and high interest rates as the “key factors holding sentiment close to recessionary lows”, the research expert continued: “It’s likely the lower than forecast inflation outcome for the December quarter, alongside a growing expectation of rate cuts later this year, will help to lift consumer attitudes.”

If that does turn out to be true, Australia can “expect housing activity to follow suit later this year”.

So, when can we expect rates to drop?

Stephen Koukoulas, renowned economy expert and the managing director at Market Economics Pty Ltd, is of the belief that “inflation’s been beaten”.

Calling inflation “yesterday’s story”, he argues that the RBA “clearly overtightened” with its decision to lift the cash rate back in November 2023.

Expectant of the latest data to lead to one or more rate cuts across the course of 2024, Mr Koukoulas set out the expectation that “the case for a rate cut will be pretty well established by the [RBA’s] 19 March meeting”.

“Whether they do it then, I’m not sure. The meeting after that is in early May, so will they be able to do it by then?”

“Unemployment’s increasing, retail sales are dreadful, house prices are slowing...”

All of these factors led Mr Koukoulas to double down on his forecast, which is somewhat tempered by the caveat: “Exactly when they kick off and exactly how many there will be remain the fascinating discussion point.”

‘Reductions can’t come soon enough’

According to Zippy Financial director and principal broker Louisa Sanghera, the rate deductions “cannot come soon enough for many mortgage holders, with many holding on by the skin of their teeth at the moment”.

“Borrowers had to cope with the most rapid rate of interest rate increases on record as the Reserve Bank pumped up repayments, almost in a frenzy, without giving mortgage holders the benefit of allowing much time to pass between each increase.”

“The November rate rise, in particular, was completely unnecessary, and I said as much at the time,” she continued.

“Now, inflation has dropped so quicky that the Reserve Bank must move to an easing bias at its meeting in February with rate cuts on the agenda in coming months, too.”

Looking into the impacts of the current cycle on the property market, Ms Sanghera also acknowledged there has been “a cohort of people who haven’t been proceeding with their real estate plans, whether it’s buying, selling or investing, until there was more certainty on interest rates.”