Inflation hike extinguishes hope of another interest rate cut this year
The inflation beast that the RBA thought it had tamed has reawakened and it spells bad news for homeowners and renters alike.
Australia’s inflation battle has kicked off again and the first victim is the prospect of a December interest rate cut.
The monthly consumer price index (CPI) rose 0.2 per cent in October to 3.8 per cent, putting the final nail in the coffin of a rate cut on 9 December.
The other measure of inflation – the one preferred by the Reserve Bank of Australia (RBA) – is the trimmed mean and that also rose from 3.2 to 3.3 per cent.
The fact it is drifting further from the RBA’s target inflation band of 2 to 3 per cent means the central bank is near-certain to keep rates on hold.
The figure announced by the Australian Bureau of Statistics on Wednesday (26 November) surprised economists who broadly expected the CPI to remain steady.
For those looking to keep a household functioning, the news was even worse.
By far the largest contributor to annual inflation was housing, up a budget-breaking 5.9 per cent from 5.7 per cent in September. This reflects cost rises in electricity, rents and new dwellings.
Electricity costs rose 37.1 per cent in the 12 months to October, up from 33.9 per cent to September.
The annual rise in electricity costs is primarily related to State Government electricity rebates being used up by households. The timing of the rollout of the Commonwealth Energy Bill Relief Fund (EBRF) rebates also impacted electricity costs. Excluding the impact of the Commonwealth and state government electricity rebates over the last year, electricity prices still rose 5.0 per cent.
Borrowers, renters hit hard
The likelihood of another rate cut in the first half of 2026 and beyond is also now in serious doubt. The next move would more likely be upwards if inflation continued to climb.
Higher inflation spells obvious trouble for borrowers looking for some savings on their mortgage repayments as they also contend with the higher cost of living.
The unpleasant CPI figure is also likely to worsen the rental crisis by increasing costs for landlords, which can be passed on to tenants, and by contributing to higher construction costs that hinder new supply.
While some of the most intense rental growth may have peaked, inflation continues to put upward pressure on rents, particularly as demand remains high due to population growth and other economic factors.
This combination means rents are likely to remain expensive, and the supply shortage will be exacerbated, making it harder for tenants to find affordable housing.
Rent increases have also outpaced wage growth, making it harder for renters to cover their housing costs.
Property likely strong despite rates outlook
The prospects of a rate cut before mid-2026 have dimmed.
Oliver Hume Chief Economist, Matt Bell, said the market had just under a 50 per cent chance of one more rate cut in the cycle being delivered at the May 2026 meeting but within half an hour of the release, that number had fallen to below 30 per cent, with the market essentially removing any further rate cuts from the outlook.
“Essentially, inflation is far too high for the RBA to be comfortable with any rate cuts in the foreseeable future.
“It means that this rate cut cycle looks like it will be 0.75 per cent in total, the shallowest easing cycle in more than 30 years.
“So while we’ve already seen the three cuts to date drive a recovery in both established and land markets, the sugar hit normally provided by a deeper easing cycle won’t be as strong for 2026/27.
“On the plus side, we do have continued strong underlying demand, rising consumer sentiment, households are in better and better shape, and we are still in the middle of a generational undersupply in new housing, which are all positive for further increases in property market activity and price.
“2026 is still probably going to be a good one for property, both land and established housing markets, but today’s data has tempered the upside.”
Domain’s Senior Economist, Dr Joel Bowman, described the latest CPI result as “coming in a touch higher than the market expected”.
“With inflation drifting up again over recent months, today’s figures make a December interest rate cut even less likely
“Holding rates steady will help cool some of the (property) price momentum we’ve seen this year – welcome news for people trying to get into the market.
“We’re also seeing these cost pressures flow through to the price of building new homes, which has been rising since August.
“If this continues, it could slow the construction of new housing supply Australia urgently needs.
“Investor activity is another major driver of the current housing market lift.
“Persistently high inflation may strengthen conversations across the industry about potential macro-measures to rein this in – a move that would be welcomed by first home buyers who are competing with investors in an already challenging market.”
