Potential interest rate hikes are back on the table thanks to persistent inflationary pressures.
On Wednesday, the Australian Bureau of Statistics (ABS) released the latest consumer price index (CPI), revealing that inflation remains stubbornly high Down Under.
Headline CPI rose 4% in the year leading up to May, easing slightly from 4.2%, the month before, while trimmed mean inflation — which many economists consider a better indicator of inflationary pressures because it strips out goods with volatile price changes — increased to 3.6%, up from 3.4% in the 12 months to April. But both figures were above the Reserve Bank of Australia's (RBA) target inflation range of 2% to 3% growth, underscoring why policy is likely to stay restrictive for longer.
Still there were some tailwinds in the market. Automotive fuel prices fell 11.9% in May, on a monthly basis. That's on top of a 7% decrease in April.
"These monthly falls include the impacts of the halving of the fuel excise on 1 April and lower world oil prices in recent weeks," said Rachael McCririck, head of prices statistics at ABS.
Annually, automotive fuel was up 7.7% in the year ending in May, down from 18.6% in April.
Meanwhile, housing costs climbed 6.5% for the year, one of the highest annual increases in the print. Annual goods inflation increased 4.2%. The main contributor was electricity, which surged 21.1% as earlier Commonwealth and state rebates ended and household relief measures expired. New dwelling prices rose 5.6% in May, year-over-year.
But even with inflation cooling, it is still above the RBA's target range. The central bank has repeatedly said it will not ease monetary policy until inflation is back within the desired band.
The central left the official cash rate (OCR) on hold at 4.35% during its June meeting. But RBA Governor Michele Bullock said the decision did not "rule out further tightening in monetary policy if that is what is required to get inflation down."
Now, the latest CPI — paired with a relatively low unemployment rate — has markets reassessing if rates have reached their peak, or if they'll continue to rise.
"I absolutely think that we will have another one to two rate increases. It's not over yet," Cara Julian, founder and mortgage broker at Melbourne-based Brava Finance, told Australian Broker.
National Australia Bank (NAB) also expects a hold at the upcoming meeting, but is forecasting the RBA's next move will likely be a decrease, although the timing remains unclear.
Julian added sentiment has shifted noticeably in recent months as market conditions evolve, including geopolitical tensions in the Middle East and recent budget changes.
"Three months ago, I would have been speaking to a customer and they'd say, 'yeah, absolutely, let's get out there; let's get a property. Let's use some equity to buy an investment property,'" Julian explained. "But I've started to see confidence swing and change in such a short period of time. And obviously, with the budget and everything coming into play, as well, that doesn't help in regards to people's decisions when it comes to investing. There's definitely less momentum in the market at the moment."
Gordon MacVicar, owner and broker at Coolum Beach and Noosaville Mortgage Choice, does not expect any near-term movement from the RBA.
"I think they're done," he said. "They condensed what they needed to do over three consecutive meetings and I think they need to wait and see how that flows through. Because we're not going to get the full effects of these three rate increases for another few months. And also, we've got oil prices dropping, which is then going to create deflation across some of those areas, as well."
Bernard Desmond, founder and chief executive officer at Melbourne-based Blank Financial, added that the latest CPI is likely not "materially going to change the outlook of the home lending market, as yet."
But he went on to say that his firm is still expecting "a couple of rate hikes in the near future. The way the inflation is tracking, it's [probable] to have at least one or two rate hikes."
Brokers say the uncertainty has triggered a surge in refinancing and debt consolidation inquiries.
"Borrowers are looking at how they can mitigate the risks," Desmond explained. "So they're opting for fixed rate terms. And we're seeing big activity in the refinancing market. A lot of customers are refinancing their loan terms to 30 years just to manage their cash flows."
MacVicar has noticed a similar trend in Queensland.
"In our market, the Sunshine Coast, a large portion of the first-time homebuyers have disappeared over the past 18 months. We're still helping them. But not at the same level as we were," he explained. "I've got a number of clients who are now talking about selling because they're worried about things. The rate increases have definitely made them reassess things. I've spoken to three or four clients this week alone who are now wanting to downsize to get a smaller mortgage. And refinancing and debt consolidations have picked up.
"I don't think it's a wholesale panic. But people are reassessing their situations in the past few months, just reorganising things so people get back to a baseline of their spending and their debts," he said.
