RBA holds cash rate at 4.35 per cent despite higher than expected inflation numbers

The Reserve Bank of Australia (RBA) has held the cash rate at 4.35 per cent despite March quarter consumer price index (CPI) figures showing an uptick in inflation.

Many economists are not surprised by the RBA’s decision to hold, believing this might be the outcome of many of this year’s meetings.

“RBA is going to sit and wait and see what unravels,” says Domain chief of research and economics Dr Nicola Powell.

“I would be very surprised if we see a rate hike from the RBA [this year],” she says. “If inflation remains sticky for longer, that’s probably when they’re more likely to make a rate hike.”

The quarterly CPI, an indicator of inflation, rose by 1 per cent in the March 2024 quarter – higher than the 0.6 per cent the previous quarter. Annual inflation fell to 3.6 per cent, still above the RBA’s 2-3 per cent target but well below its December 2022 peak.

“While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022,” says Australian Bureau of Statistics (ABS) head of prices statistics Michelle Marquardt.

“The headline [of 3.6 per cent] looks okay, but actually, when you look at the measures of core inflation or trim main inflation, that’s the parts that are most persistent that beat expectations by quite a bit, which is a bit of a signal that inflation is going to be elevated for the next few [cash] rates,” says Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics.

“The core inflation measures going up by 1 per cent in the quarter is pretty strong, and it is concerning.”

Powell adds that growing rent prices will continue to be “a thorn in the side of the CPI”.

“Rent is the largest single component that goes into inflation, and we’ve seen extraordinary rates of rental growth,” she says.

The Domain Rent Report revealed that capital rents increased by 5 per cent quarterly and 10.5 per cent annually.

In the March CPI quarterly report, the ABS identified rents as one of the most significant contributors to the rise in inflation.  

According to the RBA’s forecasts, inflation should hit its 2-3 per cent target by 2026, but Centre for Independent Studies chief economist Peter Tulip says, “It’s too reckless and gradual.” 

He believes the RBA should do everything possible to bring down inflation quicker and needs to do so by bringing the cash rate up to at least 5 per cent.

“It no longer looks as though the previously expected path of interest rates would deliver inflation on target,” Tulip says. “Whenever you get new [data], you need to adjust your plans.”

Tulip believes that increasing the cash rate will only have a “fairly small” effect on the property market, and it’s more important to bring inflation down to a target of 2-3 per cent.

However, Langcake doesn’t think it’s that black and white. 

“It’s pretty hard to say you shouldn’t tolerate a little bit more inflation and have more people unemployed because unemployment is objectively awful for those that feel it,” he says. 

The RBA has been tolerating a slower return of inflation to target these last few meetings, and it’s unlikely there will be a hike in the foreseeable future unless there is a massive tick-up in inflation, says Langcake

“At the end of last year, I thought there was a strong case for them to hike again. So, I thought they were going to in December. Now, I think they’re so close to getting to target, and I think they can probably ride it out.”​

While the likelihood of a cash rate hike is slim, Powell says the longer the cash rate stays high, the more significant the financial strain it could have on households.

“There are many household mortgage holders that are feeling the pain. And there is only so long that that household can manage that extremely tight belt,” she says.

Mozo’s finance expert, Rachel Wastell, says mortgage holders should pay attention to lenders’ interest rate movements rather than exclusively focusing on the cash rate because home loan interest rates have already started to drop.

“One of the biggest [changes from lenders] that happened last month was NAB. They cut their base variable rate by 96 basis points, but they did that because they were restructuring all their loans to offer to people on higher LVR, more affordable rates,” she says.

“Bank cuts should be monitored by mortgage holders,” she says. “If you see that your bank is cutting rates for new customers on certain loans, that might give you a little bit of leverage to call your bank and say: ‘I can see that you’re offering this rate on a very similar loan. Can you match mine?’

“Look outside of the big four to refinance. If you can’t afford to refinance and you have an offset, use that to reduce the interest you pay while you wait to either refinance when your rate drops or be able to refinance when the cash rate drops.”

For those waiting for a rate cut, Langcake predicts that the earliest the RBA will do so is in November or December if there are no inflation surprises.