Scary inflation figure leaps out of RBA's target range
Borrowers have every reason to feel frightened this Halloween, with the latest ghoulish inflation figure likely to scare the RBA away from a rate cut next week.
Like it or not Halloween is upon us, and the inflation bogeyman is poking his head out to scare borrowers.
The highest quarterly Consumer Price Index (CPI) rise since March 2023 will likely be high enough to spook the Reserve Bank of Australia (RBA).
Annual inflation to the September 2025 quarter was 3.2 per cent, up from 2.1 per cent to the June 2025 quarter.
The trimmed mean measure of inflation, which is more closely followed by the central bank’s board, also shot up.
Michelle Marquardt, ABS Head of Prices Statistics, said that when prices for some items move by large amounts, measures of underlying inflation like the trimmed mean can give more insights into how inflation is trending.
“Trimmed mean annual inflation was 3.0 per cent to the September quarter, up from 2.7 per cent to the June quarter,” she revealed Wednesday (29 October).
“This is the first time Trimmed mean annual inflation has increased since December 2022.”
Ms Marquardt added that the CPI was the highest annual inflation rate since the June 2024 quarter when annual inflation was 3.8 per cent.
Borrowers are unlikely to get an interest rate cut on Melbourne Cup Day, the first Tuesday in November, but housing affordability might be the beneficiary of a treat.
The three cuts to date in 2025 have delivered eight consecutive months of house price increases and big jumps in land sales and prices in various markets.
The chance of a November rate cut appears to have evaporated - Bloomberg has slashed those odds down to 8 per cent from 40 per cent before the inflation reading. But the inflation trajectory has also quashed the prospect of a rate cut this year.
Bloomberg forecasts one more 0.25 percentage point cut by May, but not much beyond that.
The main contributors to the quarterly CPI rise were Housing (+2.5 per cent), Recreation and culture (+1.9 per cent) and Transport (+1.2 per cent).
The rise in electricity costs (+9.0 per cent) was a significant contributor to the growth in housing inflation this quarter.
Next interest rate cut in 2025 or 2026?
The phasing out of electricity rebates was always going to pose a threat to this latest inflation data, according to Deloitte Access Economics partner Stephen Smith.
He defied the broader market’s expectations, saying a December cut was still likely.
“As electricity price rebates roll off, headline inflation was always expected to bounce in the September quarter,” he noted.
“Another bounce is expected in the March quarter of 2026.
“Neither of those moves should influence interest rate deliberations with this data unlikely to sway the next decision.”
Reflecting the wider consensus, Bendigo Bank Chief Economist, David Robertson, said 2026 was a more likely time for borrowers to look for another rate cut reprieve.
“Our revised forecasts still have one more RBA cut, but now not until February 2026,” he said.
“The unexpected jump in core inflation to 3 per cent - from 2.7 per cent - makes is it very difficult for the RBA to cut rates any further this year - despite the recent uptick in unemployment.
“A Cup Day cut is now at best around a 1 in 12 chance, having been an odds-on favourite a few days ago.
“This will leave the official cash rate at 3.6 per cent, still clearly above a ‘neutral rate’, so another cut early to mid-next year is still likely especially if labour markets continue to ease.”
Josh Gilbert, market analyst at market services firm eToro said in a note that after delivering its third interest rate cut of 2025 in August, further rate relief might be some way off.
“The RBA’s goal of bringing inflation under control will take longer than anticipated.
“This (latest inflation reading) reinforces that the disinflation process is stalling while bringing stagflation concerns into the conversation, especially if unemployment keeps picking up.”
Sally Auld, Group Chief Economist, NAB, said the bank is cautiously optimistic about the Australian economy as 2026 approaches.
Admitting parts of the inflation basket — like housing, and also market services — are “running a little bit hotter than we had anticipated”, she said the RBA still has some scope to cut eventually.
“We have a labour market that looks, give or take, looks pretty close to full employment,” Ms Auld said.
“And we have an economy that looks like it's going to get back to trend growth in 2026.
“So in terms of interest rates, what that probably means is the RBA has scope to do a little bit more - but not a lot more.”
The average variable interest rate for owner occupiers paying principal and interest is 5.93 per cent.
A 0.25 percentage point cash rate cut would reduce minimum monthly repayments by $87 for an owner-occupier with a $600,000 loan at the start of the cuts and 25 years remaining.
