Softer than expected inflation figures have buoyed mortgage holders’ hopes the Reserve Bank will spare them an interest rate hike next month, but the real test won’t come until the end of January.
Inflation figures released by the Australian Bureau of Statistics on Wednesday showed the consumer price index was flat in November, slowing the annual rate from 3.8 to 3.4 per cent.
The RBA will have been paying close attention to the data, given Governor Michele Bullock’s warning in December that it might have to raise rates if inflation appeared to be persistent.
But the central bank’s board won’t be making its mind up until it sees quarterly inflation data, due out on January 28.
The ABS’s relatively new monthly inflation measure lacks the historical data to accurately adjust for seasonal variations and the monthly data fluctuates more than quarterly data.
The key number to watch will be the December quarter trimmed mean, which strips out volatile items like electricity which has bounced around wildly in recent years due to government energy rebates.
Commonwealth Bank economist Harry Ottley said the November figures put the quarterly trimmed mean at 0.9 per cent, an “uncomfortable number for the RBA” that would force it to raise the cash rate by 25 basis points.
Underlying or trimmed mean inflation remained above the bank’s 2-3 per cent target at 3.2 per cent and sticky components like rents and dwelling construction costs were still running hot.
That will be of particular concern to the RBA board.
Minutes from its latest meeting in December revealed the board was uncertain about whether the recent inflation spike was driven more by temporary or persistent factors.
If it was the latter, it might be forced into raising rates again.
Judging by worrying growth in shelter components, like a 0.4 per cent jump in rents for the month and a 0.5 per cent rise in new dwellings, Ms Bullock’s fears about persistent inflation could be well founded.
But Westpac’s Justin Smirk said the November figures meant the December quarter trimmed mean could be even lower than the bank’s standing forecast of 0.8 per cent, which would set the RBA on track to hold rates in February and for the rest of 2026.
Another important indicator for the Reserve Bank will be the first labour force update of the year on January 22.
The RBA board minutes revealed it believed the jobs market was still a little tight.
If the unemployment rate stays at a relatively low 4.3 per cent, the RBA’s fears about capacity constraints in the labour market could be heightened.
But AMP economists Diana Mousina and My Bui expect unemployment to rise further this year, given the signal from leading labour market indicators.
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