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In bad news for those of us with a mortgage, higher-than-expected inflation figures released last week mean that the chances of an official interest rate cut on Melbourne Cup Day tomorrow have fallen to almost zero.
The question then becomes, when can we expect the next cut in interest rates, or even if the current interest rate-cutting cycle will continue.
AMP Ltd (ASX: AMP) Deputy Chief Economist Diana Mousina said in a report released in the past few days that the Melbourne Cup Day Reserve Bank of Australia meeting has historically been one where rates move, given it follows the release of the September quarter inflation data.
But given that inflation was running hotter than expected in the inflation data released last week, "any hopes for a rate cut were thrown out the window''.
Ms Mousina said the September inflation figures even raised doubts about the possibility of future cuts, given "the headline rate of inflation rose by 1.3% in the quarter (the largest quarterly increase since March 2023 and higher than our forecast of 1%''.
She went on to say:
The board is likely to be unanimous in its decision to keep rates steady and in the commentary it's likely that the board (will) indicate that it has optionality around rates in the future and that it is currently in a good position to adjust monetary policy, if required. Financial markets are pricing in some chance of another rate cut and pricing is unlikely to change after the meeting.
The headline inflation figures came in at the highest level since June last year, Ms Mousina said, with the figure looking so large due to the end of government rebates on electricity.
So when might the next cut come, if at all?
The team at Wilsons Advisory said in a research note sent to clients that while the expiry of the electricity rebates pushed headline inflation higher, the RBA's preferred measure of inflation, the trimmed mean consumer price index, also "reaccelerated sharply'' to 1% quarter on quarter, "well above consensus".
The Wilsons team said the interest rate market was now pricing in the chances of an official interest rate cut on Melbourne Cup Day at just 6%, down from 50% previously.
They went on to say:
The market is not fully pricing the next cut until May 2026 with expectations for a cut by February falling from 100% to 50%. The market now expects a May cut to be the bottom for the cash rate cycle, as opposed to fully pricing two more cuts earlier in the week.
The RBA made its first cut in the current cycle on May 21, reducing official interest rates from 4.1% to 3.85%, following that up with another 25 basis point cut in August, with the official cash rate now sitting at 3.6%.
