Pre-election interest rate cut on the cards despite inflation uptick

Ahead of the release of the figures, Capital.com senior financial markets analyst Kyle Rodda said markets would be focused on the underlying read because the headline figure had been “muscled lower” by state and federal government electricity rebates.

“Realistically, the [underlying] number needs to come in below the 3.4 per cent … to keep alive hopes of a looming rate cut,” he said ahead of the November monthly inflation read.

While the monthly inflation figures provide insight into the magnitude of price pressures in the economy, the Reserve Bank will be more concerned about the quarterly inflation figures due at the end of the month.

EY senior economist Paula Gadsby said the November inflation number, which had a bigger focus on services, continued to show persistent price pressures.

“Household budgets continue to be squeezed by rising prices, particularly for essentials,” she said. “In annual terms, food prices remained a key contributor – especially fruit and vegetables. Rents continue to rise at an annual pace of over 6 per cent, reflecting tight markets around the country.”

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Services inflation – which has remained stubbornly high – eased from 4.8 per cent in October to 4.2 per cent in November.

But with lacklustre productivity growth, a resilient labour market and strong government spending posing further risks for inflation, the Reserve Bank could keep the cash rate at 4.35 per cent for the first few months of the year, Gadsby said.

Meanwhile, job vacancy data also released by the ABS on Wednesday showed there were 344,000 vacancies in November last year, up by 14,000 from August – the first quarterly increase since May 2022, when vacancies reached their historical peak.

While the number of vacancies remains 130,000 jobs lower than in May 2022, it is still about 117,000 jobs more than before the pandemic, with 14 of the 18 industries recording higher vacancies. The biggest monthly vacancy increases were in customer-facing industries such as arts and recreation services (up 28.5 per cent) and accommodation and food services (up 20.1 per cent), while construction (down 11.5 per cent) clocked the biggest fall in vacancies.

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The ongoing high level of vacancies reflects continued labour shortages in many industries, with November labour force data from the ABS showing unemployment dropped to 3.9 per cent as more people found work.

The job vacancy numbers point to continued tightness in the labour market, which the Reserve Bank uses as another gauge on top of inflation to determine the imbalance between demand and supply in the economy. The higher job vacancies and continued low unemployment could keep the RBA cautious about cutting rates, especially if inflation remains stubbornly above the bank’s target.

Moody’s Analytics economist Harry Murphy Cruise said the November inflation print was broadly good news for those hanging out for interest rate cuts, but that an uptick in job vacancies would give the RBA reason to take a cautious approach.

“The rise in job vacancies suggests the labour market is tightening, with firms finding it harder to hire talent,” he said.

“The bulletproof labour market is already a key concern for the RBA, with the board noting that a rise in unemployment will be needed before it is confident enough to cut rates.”

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