Tim Hext: No rate cuts for now, but still likely in February

What does a lift in September-quarter inflation mean for rates? Pendal’s head of government bond strategies TIM HEXT explains

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AUSTRALIA experienced a surge in inflation last quarter.

Headline inflation printed at 1.3% and trimmed mean (or underlying) was 1% for the three months to September.

This was slightly higher than expectations of around 0.85% for trimmed mean.

The annual numbers look more dramatic because the very low headline prints from last year’s electricity subsidies drop out.

Headline went from 2.1% to 3.2%. Underlying only moved from 2.7% to 3%.

Either way the media headlines are easy to write: “Inflation above the RBA target band”.

No doubt many will now be calling for the end of the rate-cutting cycle.

Next week the Reserve Bank will need to revise up its year-end forecasts for inflation from 2.6% trimmed and 3% headline to more like 2.9% and 3.3%.

This rules out any cuts this year.

But we must be forward looking.

What about 2026 ?

The good news is that inflation will moderate in Q4 and early 2026.

Early estimates put headline and underlying closer to 0.5% and the pace to move back to RBA target.

The full monthly numbers – which will be released from November onwards – will give us an early picture.

If employment remains weak the Reserve Bank would be back in play. 

The key will be the interaction between a stronger consumer and employment.

It’s too early to call the end of the rate cut cycle and we still expect Australian rates to converge with US rates nearer 3% by mid next year.

A breakdown of Q3 CPI

For those interested in the breakdowns, below we explain where the main source of inflation is coming through.

 1. Housing

Almost half of the headline inflation increase came from housing – even though it makes up only 22% of the CPI basket.

The Bureau of Statistics singled out dwelling prices as a key mover:

“Over the past 12 months project home builders have responded to a subdued new home market by increasing incentives and promotional offers to entice new business.

“In the last three months, a slight uptick in demand has seen project home builders in some cities reduce promotional offers and raise base prices.”

At 7.5% weight this pickup alone added 0.1% to CPI.

Property rates went up 6.3% as annual council rate rises are pushing up well ahead of inflation, adding 0.2% to the CPI.

Electricity prices were up 9% on the quarter as subsidies were removed and annual price reviews kicked in.

2. Recreation and culture

Travel prices have picked up over the quarter, up almost 3%. This added almost 0.2% to CPI.

3. Goods prices

Goods prices were up 1.3% on the quarter and are now at 3% over the year.

However, stripping out volatile items like food and tobacco the pace is nearer 2%.

If car prices resume a moderating trend then good prices should settle back towards the usual pace of 1-1.5%.

What it means for borrowers and investors

The RBA will need to talk tough on inflation in next week’s statement.

Question after question will be asked about the end of the rate cycle, or even when will the first tightening be. This is a kneejerk reaction.

Similar to the US, we think this is a short-term surge in inflation.

While new dwelling inflation will stay tight – helped by the government yet again stoking demand more than supply – other area are less of a medium-term concern.

By mid next year inflation should be back at 0.5 to 0.6% per quarter, comfortably within the RBA band.

Employment will then dictate if more cuts are to come.

As short rates move above cash we will be using the opportunity to lengthen duration.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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