Australia’s inflation rate has come in lower than economists expected, raising hopes the Reserve Bank may hold off on lifting interest rates next month.
Official figures show inflation fell to 3.4 per cent in November, down from 3.8 per cent in October. Economists had expected a smaller drop, to 3.6 per cent.
Put simply, prices are still going up, but not as fast as they were, which is good news for interest rates.
Housing remained the biggest driver of rising prices, with housing costs up 5.2 per cent over the past year.
Food prices rose 3.3 per cent, while transport costs increased 2.7 per cent.
Goods inflation continued to cool, easing to 3.3 per cent annually as electricity price growth slowed sharply.
Power prices rose 19.7 per cent in November, down from a 37.1 per cent surge the month before.
Services inflation also softened, easing to 3.6 per cent, after strong holiday travel demand pushed prices higher in October.
The Reserve Bank will meet next month to decide what to do with interest rates, with Governor Michele Bullock signalling she is weighing whether to keep rates on hold or lift them.
The Reserve Bank warned two things would need to occur to avert rate hikes in 2026.
Firstly, inflation data would have to show that the recent pick-up in price growth was down to volatile or temporary factors, rather than stickier items such as market services and new dwellings.
Secondly, the RBA would have to be convinced that financial conditions were still restrictive and therefore putting downward pressure on inflation.
VanEck deputy head of investments and capital markets Jamie Hannah said the latest data may have taken a near-term rate hike off the table.
‘Had inflation continued to move north, this could have sealed the deal for a rate hike next month 0 the first increase in more than two years,’ he said.
‘As it stands, the positive developments from today’s inflation print could be enough to keep the rate-hike wolves at bay for now, but the outlook over 2026 remains far from certain.’
Others argue the inflation fight is far from over, with Judo Bank chief economic adviser Warren Hogan saying interest rates still need to rise.
‘There’s less than a quarter of the CPI basket below the RBA’s target band,’ he told Sky News.
‘The reality is that over the past six months the economy has improved and inflation has lifted, so the current rate setting is probably not appropriate.
‘I think they should raise rates in February.’
Capital Economics is also sticking to its view that the Reserve Bank could lift the cash rate as soon as next month.
‘It’s probably still too strong for the RBA’s liking,’ said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
‘With little spare capacity left in the economy and the labour market still tight, there is a strong case for the RBA to begin tightening policy again before long.’
Before the inflation figures were released, Commonwealth Bank and NAB were forecasting a 0.25 percentage point rate hike, while ANZ and Westpac expected the cash rate to remain unchanged at 3.6 per cent.
The RBA will next meet on February 3 to decide if interest rates will drop, rise or stay on hold. Pictured: Reserve Bank governor Michele Bullock
