Mortgage relief on ice as CPI tops forecasts

Bernadette Lunas for yourmortgage.com.au

Home loan borrowers will likely have to wait for the next bout of mortgage relief after Australia’s annual inflation rate rose 3.2% in the 12 months to September.

The September-quarter Consumer Price Index (CPI) came in hotter than expected, effectively taking a November cash-rate cut off the table.

This is the fastest pace of price rises since the June 2024 quarter, when annual inflation hit 3.8%.

Zooming into the quarterly numbers, prices rose 1.3% from July to September, marking the highest three-month increase since March 2023.

"The largest contributor to this quarterly movement was Electricity costs, which rose by 9.0%," ABS head of prices statistics Michelle Marquardt said.

The ABS pointed to the annual rise in electricity prices across all capital cities that took effect in July and to the timing of energy rebates as key drivers.

The RBA had earlier acknowledged headline inflation would lift this quarter as various government electricity rebates wore off.

What does this mean for mortgage rates?

Whether policy would be eased at the RBA Board meeting next week hinges largely on the September quarter CPI.

The trimmed mean inflation, the Reserve Bank's preferred measure which excludes items with volatile prices such as electricity, surged 3% year-on-year, faster than the central bank's forecast of around 2.6%.

"This is the first time trimmed mean annual inflation has increased since December 2022," Ms Marquardt noted.

Quarterly, the RBA had forecast trimmed mean to land at 0.6%.

RBA Governor Michelle Bullock earlier noted that the board would likely consider quarterly inflation 30 basis points higher than forecast as a "material" upside surprise.

"If it came in at 0.9%, I think that would be quite a material miss," she said at the annual ABE business dinner on Monday.

The ABS data revealed trimmed mean inflation rose at a quarterly pace of 1%.

Bendigo Bank chief economist David Robertson said "a Cup Day cut is now at best around a 1 in 12 chance."

He expects the official cash rate, which is the benchmark interest rate for products like home loans, to stay at 3.60% until the year-end.

"It's still clearly above a 'neutral rate'," Mr Robertson said, while adding that another cut early to mid-next year is "still likely", especially if labour markets continue to ease.

"Our revised forecasts still have one more RBA cut, but now not until February 2026," Mr Roberston said.

Since this year's easing cycle in February, Australia's official cash rate has been reduced by a cumulative 75 basis points.

How about a December rate cut?

The economists at ANZ anticipate a "unanimous" hold decision at the 3-4 November RBA meeting following the CPI data.

This is despite a recent rise in the unemployment rate, which surged to 4.5% in September.

"If the activity backdrop proves materially weaker than anticipated, the RBA board does have the option of easing in December," ANZ head of Australian Economics Adam Boyton said.

The final RBA meeting this year will come after the release of another labour force print and the September quarter national accounts.

However, with the latest inflation report being hotter than expected, the central bank would likely need strong evidence to justify cutting rates ahead of Christmas.

"We expect the more likely path for policy will be a final 25 basis points easing in the first half of 2026, albeit now with risk that our expectation of a final rate cut in February ends up occurring later (in May), or not at all," Mr Boyton said.

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