Analysts Forecast Delay in RBA Rate Cuts as Infation Exceeds Expectations

Australians may not see interest rate cuts until at least 2025 as new data reveals infation rates not cooling as quickly as anticipated.

The Australian Bureau of Statistics (ABS) reported on Wednesday that the Consumer Price Index (CPI) increased by 1% during the March quarter, surpassing the expectations of economists and the previous quarter’s rise of 0.6%.

While the annual infation rate has decreased to 3.6% from 4.1% in December 2023, remaining within the Reserve Bank of Australia’s (RBA) target range of 2% to 3%, experts warn that the path to lowering infation remains challenging. Factors such as a robust job market, impending personal income tax cuts, and persistent high prices for services and essential goods could push back the timing of the RBA’s anticipated rate reductions.

The trimmed mean, the RBA’s preferred infation measure that excludes volatile price shifts, has only marginally decreased to 4% from 4.2% in the previous quarter, signalling less cooling than hoped. This development comes ahead of the RBA’s upcoming interest rate decision next month, where the focus will shift to its revised economic forecasts and potential adjustments in its infation target timeline. Cameron Kusher, Director of Economic Research at PropTrack, commented that the unexpected strength in the quarterly infation fgure is likely to delay the frst rate cut to early 2025. Financial markets have adjusted expectations, accordingly, no longer anticipating a rate cut this year, infuenced by last week’s robust domestic job data and persistent high infation in the US.

Persistent Housing Pressures

The housing sector continues to be a signifcant driver of infation, with health, education, and food costs also contributing to price increases during the quarter. Michelle Marquardt, ABS Head of Prices Statistics, highlighted that rental infation is climbing at its fastest pace in 15 years due to low vacancy rates across major cities.

Further compounding the issue, new data from PropTrack shows that rents have increased by 9.1% over the past year, outpacing property price growth. According to Kusher, despite signs that rental growth may slow, a signifcant reduction or stabilization is unlikely in the near future. The combination of a decade-low in housing construction and fuctuating investor activity suggests that rental costs will continue to escalate above infation rates.

Economic and Housing Analyst Views

Despite the overall downward trend in annual infation, some economists caution that it is still premature for the RBA to consider rate reductions. The persistently high infation result has led analysts at Westpac to postpone their rate cut forecast to November 2024, rather than September.

Luci Ellis, Westpac Chief Economist and former RBA assistant governor, expressed concern over the trimmed mean measure remaining at 4%. “Although headline infation has edged closer to the RBA’s target range, the underlying infation pressures suggest a more prolonged period of elevated rates,” Ellis noted.

Similarly, Tim Reardon, Chief Economist at the Housing Industry Association, described the 1% quarterly CPI increase as worrisome, indicating that high infation may become more entrenched in the economy, driven by ongoing housing supply shortages.

HSBC Chief Economist Paul Bloxham remarked that while the peak in cash rates might have been reached, there remains a risk that the next adjustment could be an increase rather than a decrease. “The journey to sustainably achieve the mid-point of the RBA’s target band appears longer than anticipated,” Bloxham added.

This complex economic backdrop underscores the challenges facing the RBA as it navigates the delicate balance of fostering economic growth while managing infationary pressures.

The increasing presence of high-income earners in the rental market is intensifying competition for housing and exacerbating affordability issues, signalling deeprooted systemic problems in the housing sector. According to a study by the Australian Housing and Urban Research Institute (AHURI), the proportion of higherincome households in the private rental market has signifcantly risen, from 8% in 1996 to 24% in 2021. Meanwhile, the number of lower-income renters has remained largely unchanged, underscoring the widening gap in housing accessibility. This trend has been driven by a worsening in housing affordability, reaching its poorest state in over three decades, coupled with a long-term decline in homeownership rates. The PropTrack Housing Affordability Index reveals that a household earning the median income in Australia can currently afford only 13% of homes sold nationwide, with lowerincome earners virtually priced out of buying a home. This shift is partly due to escalating house prices and declining affordability, which delay homeownership and force more individuals into the rental market. Furthermore, census data highlights a decreasing trend in homeownership rates across successive generations since the mid-20th century, with younger groups increasingly less likely to purchase homes as they age. This shift contributes to more people choosing or needing to rent for longer periods.

Rental markets have also experienced severe strains. PropTrack’s Rental Affordability Report indicates that renters faced the toughest market conditions in at least 17 years in 2023. Over the past four years, rental prices have surged by over 40% in both capital cities and regional areas since the onset of the pandemic. This rapid increase in rental costs has signifcantly outpaced household income growth, leading to a higher proportion of income being required to cover rent.

Despite a slight easing in rental price growth this year, the increases remain substantial. As of March 2024, the national median advertised weekly rent rose by 9.1%, reaching $600. This increase was particularly pronounced in capital cities, where median rents climbed to $625 per week. For a median household earning $110,000 annually, only 30% of advertised rentals are affordable, based on spending 25% of pre-tax income on rent, with even lower percentages in more expensive markets like Sydney.

The scarcity of affordable rentals is even more critical for lowerincome households, who fnd almost no affordable options in current listings. Higher-income renters, with more fnancial fexibility, often opt for more affordable rentals in competitive markets, thereby intensifying the pressure on lower-income renters seeking similar housing.

This phenomenon has not only affected urban areas but also smaller capitals and regional markets, where rental prices have skyrocketed since the pandemic began. The ability to work remotely has prompted many to relocate to less expensive areas, maintaining strong population growth in these regions and further fuelling rent increases. Signifcant rent hikes have been particularly notable in Perth, with a 76% increase since the pandemic’s start, and in Brisbane and regional Queensland, where rents have risen by 50% and 55% respectively. This disproportionate growth in cheaper markets has drastically reduced the proportion of affordable rentals available, underscoring the urgent need for policy interventions to address housing affordability and ensure equitable access to housing across income levels.