Why the RBA may lift rates again despite inflation slowing

Impact Economics’ lead economist Dr Angela Jackson told 9news.com.au the annualised rate of inflation is running at 3.2 per cent which is close to the Reserve Bank of Australia’s target range of 2 to 3 per cent.

“It is really good news for Australian households in terms of facing cost of living pressures,” she said, noting it puts pressure on the Reserve Bank to ease interest rate rises given the financial impact on households.

But the composition of the inflation data has changed which could also cause concern for the central bank.

“We are seeing weaker inflation in terms of goods, supply issues have resolved and demand has shifted but we’re seeing stronger inflation in services like hairdressing, childcare, rent and insurance,” she said.

“That may cause concern to the Reserve Bank that inflation is becoming entrenched. So while they’re seeing it slow significantly, some of these price rises are becoming entrenched in the economy.

“It may give them reason to think a little bit harder to lift [interest rates] again.”

But the decision remains in the hands of the central bank which wants to battle inflation.

Canstar’s editor-at-large Effie Zahos said having headline inflation come in better than the central bank’s forecast of 6.3 per cent annually does increase the chance of a pause in the August decision.

“Even though job numbers in June came in surprisingly strong, the unemployment rate is a lagging indicator,” she said.

“If the June retail sales, which come out on Friday, are flat then there is certainly less pressure for the Reserve Bank to hike the cash rate in August.”

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Currently, the cash rate sits at 4.1 per cent after the bank held at the July decision.

On a $500,000 loan, mortgage holders are paying approximately $1217 more a month than they were in May last year.

RBA Governor Philip Lowe and the board did weigh up another increase in the July decision despite surging repayments and likely will again in the August call.

“Members agreed that some further tightening of monetary policy may be required to bring inflation back to target within a reasonable timeframe, but that this depended on how the economy and inflation evolve,” the recent minutes read.

Inflation doesn’t just relate to the central bank’s decision it can also signal good news for grocery prices as goods inflation slows.

Annual inflation for goods was 5.8 per cent in the latest data, down from 7.6 per cent in the previous quarter.

Jackson said hopefully grocery shop costs will alleviate in the coming months as high inflation slows but the question remains whether prices will fall as quickly in Australia as overseas.

“It might not happen due to a lack of competition in some of these markets like supermarkets and big retailers where there isn’t the same level of big competition,” she said.

“I think the Reserve Bank will be keeping a close eye on that. As demand comes off and supply side issues resolve, do we see all the price decreases flow through to consumers as well.”