David Koch fears Australia could soon enter a ‘nightmare scenario’ where interest rates start climbing again. (Source: Getty/AAP)
Homeowners could soon enter a “nightmare scenario” where they’re paying more for their mortgages as well as other goods and services. Trimmed inflation has ticked up for the first time since December 2022 and it’s put a huge dampener on the possibility of a rate cut from the Reserve Bank next week.
After the latest inflation reading, future cuts could be off the cards altogether and borrowers could even be asked to cough up more of their weekly budget. Compare the Market’s economic director and Yahoo Finance contributor David Koch said the more than two-year run of good news might well and truly be over.
“If inflation keeps coming in like this, then we might not see any cuts at all,” he said.
“The nightmare scenario is that this is the first sign of inflation starting to trend up again. If that’s the case, we could even see the Reserve Bank increase the cash rate in the first half of next year.”
Ever since trimmed inflation peaked at 6.8 per cent at the end of 2022, it’s been on a slow but steady downward trajectory.
Homeowners endured 13 rate rises and 14 holds between 2022 to 2024, which helped bring inflation under control, but hit everyday Aussies’ wallets hard.
They were given their first slice of mortgage relief in February this year with a 0.25 per cent rate cut. Two more came in May and August.
It was welcome news for those who held on during the tough period, and they have been able to save hundreds of dollars a month as a result.
Despite this, many haven’t truly felt any better off. Compare the Market’s Household Budget Barometer found 93 per cent of people feel there has been no easing in the cost-of-living crisis.
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Data from the Australian Bureau of Statistics confirmed that while inflation for food and non-alcoholic beverages, and petrol have remained largely steady, other costs have shot up dramatically.
Electricity prices jumped 9 per cent in the September quarter, following an 8.1 per cent rise in the June quarter.
Overall, our power bills have experienced a 23.6 per cent rise over the past 12 months.
“Energy rebates were keeping that inflation figure artificially low,” Koch said.
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“Now they have rolled off, we’re seeing energy price rises in full effect – and it’s hurting.”
Property rates and charges also lifted, which is relatively standard for this time of the year as local councils review their rates and levies. However, these costs have still increased 6.3 per cent this year, which is the highest rate of inflation since 2014.
In the June quarter, trimmed inflation was at 2.7 per cent. In the September quarter, it climbed to 3.0 per cent.
If trimmed inflation continues in this new direction, it means Aussies will be paying more for goods and services in some sectors of the economy. And if that happens, the RBA might be forced to hike rates.
Trimmed inflation has lifted to 3.0 per cent after falling for several months. (Source: ABS)
A few months ago, economists and banks were predicting there would be a rate cut in November, February and May.
This was all based on the idea that trimmed inflation would continue to come down and land nicely in the RBA’s target of the middle of 2-3 per cent.
But unemployment has spiked and inflation is now heading upwards.
“We’ve all been fed this line by a lot of economists that we could see two or three more rate cuts in the coming months. I reckon the idea of any more rate cuts in the next six-nine months is seriously in doubt now,” Koch said.
“People are still getting hit by price rises. Hopefully this is a reality check for governments to align their policies a bit more on this because inflation isn’t an inanimate object – it’s being driven by many factors in the economy and government projects can have a big influence.”
He said all eyes will be on the December quarter inflation readout, which will be released in late February, to see if the September quarter was a once-off or it’s the start of a new trend.
Canstar’s director of data insights, Sally Tindall, told Yahoo Finance that homeowners can be proactive to reduce their mortgage repayments.
“You don’t have to wait to see what the RBA does to start haggling with your lender or considering refinancing to a different lender,” she said.
“A lot of banks are very keen to keep you as a customer, and might be able to hand you a rate cut with a bit of negotiating from your side.”
However, it’s unclear whether those good graces will last if inflation shoots up.
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