Annual Inflation Falls to Lowest Level in Over Three Years: What Does It Mean for Interest Rates?

Inflation has reached its lowest level in years, but the RBA has kept interest rates unchanged. Find out what this means for future rate cuts and the broader economy.

Annual Inflation Falls to Lowest Level in Over Three Years: What Does It Mean for Interest Rates?

In November 2024, the Reserve Bank of Australia (RBA) decided to keep the cash rate on hold at 4.35%, even as annual inflation fell to its lowest point in over three years. This decision has led many to wonder what it means for future interest rates and the economy as a whole. Let’s explore the RBA’s rationale and what it could mean for interest rates going forward.

Why Did the RBA Keep Rates on Hold?

The RBA’s decision to maintain interest rates at 4.35% was influenced by several key factors:

Underlying Inflation Remains High
While overall inflation has decreased, the RBA is focused on underlying inflation, which excludes volatile items and provides a clearer view of inflation momentum. The RBA considers this a more accurate gauge of inflation trends, and currently, it remains higher than the central bank’s target range of 2–3%. The RBA has indicated that it doesn’t expect underlying inflation to return to the target range until 2026, highlighting that inflationary pressures are still embedded in certain areas of the economy.

Rising Services Prices
The costs of services—such as rents, health care, insurance, and education—continue to rise. These persistent increases are a significant concern for the RBA, as services inflation is typically less volatile and more sustained than goods inflation. As long as these costs continue to climb at a rapid pace, the RBA is likely to keep monetary policy restrictive to contain demand and encourage slower price growth.

A Cautious Approach to Monetary Policy
The RBA has taken a cautious stance with monetary policy, aiming to ensure inflation moves sustainably toward its target range. The central bank has indicated that it won’t ease monetary restrictions until it is confident that inflation will continue to trend downward without the need for further intervention. This cautious approach reflects the RBA’s goal of balancing inflation management with economic stability.

What This Means for Households and Interest Rates

With rates on hold and inflation easing, what does this mean for Australian households and the broader economy? Here are some insights into how these developments could impact personal finances and future rate cuts.

Potential Rate Cuts in 2025
Economists are forecasting that the RBA could begin cutting rates in the first half of 2025 if inflation continues to slow. This would bring some relief to borrowers who have felt the pinch from higher interest rates. However, with underlying inflation still above target, any rate cuts are expected to be gradual. Households should be cautious in planning for lower interest costs until there is clearer evidence of sustained rate reductions.

Uneven Impact of Rate Rises
While inflation has eased overall, the impact of previous rate hikes is unevenly felt across the economy. Households with variable-rate mortgages or other debt obligations are experiencing higher repayment costs, while others with fixed-rate products may not feel the impact as acutely until their terms end. For some households, particularly those on lower incomes, high interest rates combined with persistent service price inflation continue to strain finances.

Balancing Short-Term Needs with Long-Term Stability
For now, the RBA’s policy stance underscores the importance of financial resilience. With rate cuts on the horizon but not yet guaranteed, households may want to focus on managing cash flow and building a financial buffer. Consider reviewing your budget and assessing high-interest debt to prepare for potential future rate adjustments.

Looking Ahead: Indicators to Watch

As we approach 2025, there are a few economic indicators that can provide insight into the RBA’s potential course of action:

Labour Market Conditions: A tight labour market typically supports wage growth, which can contribute to inflationary pressures. The RBA will be watching employment trends closely as they can influence both household spending and inflation.

Global Economic Conditions: The broader global economy, including the actions of other central banks, can impact the RBA’s decisions. If global economic conditions soften or other central banks cut rates, this may influence the RBA’s approach.

Consumer Price Index (CPI): The CPI measures overall inflation and remains an essential indicator of inflation trends. Monitoring quarterly CPI updates can help gauge whether inflation is stabilising within the RBA’s target range.

Final Thoughts: Preparing for Financial Stability

In light of the current economic conditions, it’s important to approach your finances with flexibility. While rate cuts may be on the horizon, it’s prudent to continue focusing on financial health in the near term. Building a buffer and reducing debt where possible can help provide stability, no matter the direction of future rates.

For tailored financial guidance that aligns with your personal goals and circumstances, reach out to Poole Advisory. Our team is here to help you navigate these economic changes and make informed decisions for your financial future.

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This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns

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Annual Inflation Falls to Lowest Level in Over Three Years: What Does It Mean for Interest Rates?