Rate pause expectations strengthen as inflation falls

On Wednesday (29 March), the Australian Bureau of Statistics (ABS) released the monthly consumer price index (CPI) data for February, revealing that annualised inflation fell for the second consecutive month to 6.8 per cent, in February.

The drop was below market expectations (with many economists having expected CPI to remain above 7 per cent) and represented a 0.6 per cent decline from the previous month.

The most significant contributors to the annual increase seen in February were housing (+9.9 per cent) — particularly driven by the cost of building materials and high rents.

Michelle Marquardt, ABS head of prices statistics, commented: “This month’s annual increase of 6.8 per cent is lower than the 7.4 per cent annual rise reported in January 2023. 

“This marks the second consecutive month of lower annual inflation, also known as ‘disinflation’, from the peak of 8.4 per cent in December 2022.”

Noting that housing was once again leading inflation, Ms Marquardt added: “The annual increase for the housing group in February (+9.9 per cent) was lower than January (+10.4 per cent). 

“New dwellings grew 13.0 per cent in the 12 months to February which is the lowest annual growth since February 2022 as price rises for building materials continue to ease. 

“Rent prices rose again due to the tight rental market, maintaining the 4.8 per cent annual growth recorded in January.”

Other lead drivers to rising inflation were the price of food and non-alcoholic beverages (+8.0 per cent), transport (+5.6 per cent) and recreation and culture (+6.4 per cent).

The ABS included a new monthly series for electricity prices into the indicator and revealed that electricity prices rose 17.2 per cent for the year to February (included under the housing category).

While fuel prices drove the increase in transport, annual growth for fuel is the lowest it has been in two years, the ABS noted.

AMP calling a rate pause 

The monthly CPI result is expected to influence the RBA’s next monetary policy board decision, along with the latest retail sales figures (which increased by a marginal 0.2 per cent, compared to January’s 1.8 per cent rise), employment figures (which showed a seasonally adjusted unemployment rate of 3.5 per cent, down from 3.7 per cent  in January), and business indicators. 

Diana Mousina, senior economist at AMP Australia, explained: “The monthly February consumer price data was the final piece of the economic data puzzle to be released before the RBA’s Board meeting next Tuesday.  

“Governor Lowe indicated that the board would be watching four major data releases before April board meeting:

1. The employment figures (better than expected in February but the unemployment rate has clearly bottomed and leading indicators of employment indicate slowing momentum in jobs growth);

2. The consumer and business surveys (consumer confidence remains around recessionary-like levels and business confidence is weakening);

3. The retail sales figures (retail spending has lost momentum in the past few months); and 

4. [The] monthly inflation data.

“Overall, the data showed that while the Australian economy is holding up, it has lost some momentum since late 2022, which is a sign that interest rate hikes are working,” she said.

“The banking crisis in the US and Europe (which has partly been driven by high interest rates) is another issue for the RBA to consider. While Australian banks are not directly impacted, the crisis could filter into Australia if confidence around the banks deteriorates which will lead to liquidity problems and deposit outflows. 

“Given the weakening in domestic economic momentum, the slowing in inflation and the risks in the global banking sector, we see the RBA keeping the cash rate on hold next week and keeping the cash rate on hold before the change of rate cuts late this year,” the AMP senior economist said.

Indeed, following the central bank’s last cash rate decision, RBA governor Philip Lowe hinted at a near-term pause.  

He said earlier this month that the board would carefully assess key economic data to be released ahead of the next board meeting, making specific reference to monthly employment, inflation, retail spending, and business indicators.  

“If collectively, they suggest that the right thing is to pause, then we’ll do that. But if they suggest that we need to keep going, then we will do that,” he said at the time. 

“So, we’ve got a completely open mind about what happens at the next board meeting.”

ANZ still expects a hike next week

However, ANZ economists have continued to state that the rate call next week will be a hike, outlining that while the monthly CPI figure fell, inflation momentum remains strong and is not slowing as much as the fall in annual inflation would suggest.

“While the RBA has signalled its intention to pause at some point in the coming months, we continue to think that the data is not yet consistent with a pause... While encouraging, the decline in annual inflation so far doesn’t guarantee that it falls back to target under current policy settings.

“Along with previous data releases, this makes us comfortable with our call that the RBA will raise the cash rate 25 bps at its April meeting,” ANZ said.

[Related: RBA considering pause in April]