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Australian borrowers may have to wait longer for mortgage interest relief due to major changes from the Reserve Bank, even though inflation has fallen to its lowest level in two years.
The official monthly reading of the consumer price index for January showed that headline inflation grew at an annual rate of 3.4 percent, the lowest level since late 2021.
The monthly indicator showed inflation only marginally above the Reserve Bank’s 2 to 3 per cent target.
Meat and seafood prices fell 2 per cent over the year, but bread and cereal prices rose 7.4 per cent, Australian Bureau of Statistics figures released on Wednesday showed.
Even if headline inflation moderates faster than the RBA expects, borrowers could have to wait longer for potential rate cuts and less severe monthly mortgage payments.
Australian borrowers may have to wait longer for rate cuts amid major changes from the Reserve Bank, even though inflation has fallen to its lowest level in two years (pictured, a shopper from Woolworths in Sydney)
This is because the Reserve Bank will meet eight times in 2024, instead of the previous 11, under major changes by Treasurer Jim Chalmers.
With longer intervals between meetings, AMP economists My Bui and Diana Mousina said the Reserve Bank would be worried if consumers started expecting rate cuts soon.
“The RBA will likely maintain its gentle upward trend, fearing that any talk of interest rate cuts will lead to a rise in inflation expectations and a further rise in inflation,” they said on Wednesday.
Like the US Federal Reserve, the RBA will also hold two-day meetings eight times a year.
But unlike the United States, Australia’s most comprehensive inflation data is published quarterly rather than monthly.
Inflation data for the March quarter will not be published until April 24, and the RBA is unlikely to ease rate cuts in May, even if the figure is well below t.The annual pace for the December quarter was 4.1 percent.
For evidence of a steady decline in inflation, the Reserve Bank would likely wait until the August meeting, following the July 31 release of June quarter inflation data.
But if those numbers aren’t low enough, borrowers could have to wait until the November meeting, following the October 30 release of inflation data for the September quarter.
The Reserve Bank does not expect inflation to fall within its target band of 2 to 3 percent until December 2025, but could cut rates sooner to stop a severe economic slowdown.
With an election due next year, Dr Chalmers would also become the first treasurer to give up his power to veto RBA decisions.
This mechanism has never been used since the Reserve Bank was legislated in 1959.
The Treasury Laws (Reserve Bank Reforms) Amendment Bill 2023 was introduced in Parliament in November last year.
Even if inflation moderates more quickly, rate cuts could take longer as Treasurer Jim Chalmers changes the Reserve Bank’s schedule so that it meets eight times a year instead of 11.
This will create a specialized monetary policy board with six external members to decide interest rates, to replace the existing arrangement of the RBA board deciding the cash rate.
The Senate Economic Legislation Committee is due to present its report on March 21.
The RBA last raised rates in November, taking the cash rate to a 12-year high of 4.35 per cent.
This was the 13th rate hike in 18 months, marking the most severe pace of monetary policy tightening since 1989.