Why you can still bet on a Melbourne Cup Day rate cut

Wednesday’s Australian Bureau of Statistics release of its monthly consumer price index indicator data shows annual inflation rose 2.8 per cent in July – above economists’ expectations.

At first glance it’s a horror result. Annual inflation was running at 1.9 per cent in the year to June 30, and now it’s leapt 47 per cent to 2.8 per cent for the year to July 31, and is back at the high end of the RBA’s 2-3 per cent target band.

But dig into the details, and more information becomes clear.

The surge was largely driven by electricity prices jumping 13 per cent annually – after being negative 6.3 per cent in the year to June – because households had used up federal and state government energy bill rebates.

Last year’s federal government rebate of $300 per household ended but has since been extended to December this year via a new $150 rebate, which should remove some of that power price surge.

“State government electricity rebates that have been used up by households over the year include the Queensland $1000 state rebate, the Western Australia $400 state rebate and the Tasmania $250 state rebate,” the ABS says.

All these electricity shenanigans show that when governments throw buckets of cash at households to artificially and temporarily lower home energy bills, the chickens eventually come home to roost.

Fuel, clothing and housing costs also climbed sharply in July compared with June.

While the higher numbers are a concern, there are three key reasons to be alert but not alarmed:

• Economists say the electricity price surge should partially reverse in the coming months as new – albeit smaller – energy bill rebates kick in.

• These monthly inflation indicator numbers are more of a guide to short-term performance, and the RBA prefers to base its interest rate decisions on the main quarterly CPI numbers, next due in late October.

• Global economic, trade and geopolitical uncertainty remains ridiculously high, and Australia’s economy continues to struggle, with our economic growth per capita still going backwards in the latest GDP figures.

So what does it all mean for home loan borrowers?

Firstly, enjoy the RBA’s August cash rate cut of 0.25 percentage points, which started flowing through to major bank customers last week and now include all big four banks.

Research group Canstar calculates that the three RBA rate cuts since February have saved a borrower with a typical $600,000 mortgage $272 a month, while those with a $1m mortgage are paying $453 per month less than what they were in January.

Consider shopping around and refinancing for a better deal. The average variable mortgage rate for existing owner-occupiers today is 5.54 per cent, Canstar estimates, and for new customers it’s 5.5 per cent.

It says the lowest big four bank variable rates today are 5.34 per cent, offered by CBA and Westpac, while ANZ has 5.5 per cent and NAB 5.69 per cent. Meanwhile, the best rates on the market now start with a “4”, led by Easy Street’s 4.89 per cent and Horizon Bank’s 4.99 per cent.

Many borrowers are choosing not to pocket the RBA rate cuts but to instead use the savings to reduce their loan principal faster. Three of the big four banks now automatically keep repayments the same unless the customer asks for the reduction – helping them build up a buffer for the next rate rise.

A rise is not on the horizon, and a cut in November is still on the cards, according to economists and financial markets.

This article first appeared in The Australian as Shock inflation surge should not derail November RBA rate cut plans