Economists generally agree that the annual trimmed mean inflation of 3.2 per cent for the December quarter – below the Reserve Bank’s forecast of 3.4 per cent – should be enough to reassure the central bank that inflation is on track to return to its target within a reasonable time frame.
In fact, financial markets are now pricing in a 92 per cent probability of a 0.25 per cent rate cut at the February meeting.
Data from the Australian Bureau of Statistics (ABS) on Wednesday revealed a sizeable drop in both the headline and trimmed mean consumer price index (CPI) prints, beyond market consensus of 2.5 per cent and 3.3 per cent, respectively.
Namely, CPI rose 0.2 per cent in the December quarter and 2.4 per cent annually, while trimmed mean inflation – which removes government subsidies from the equation – came in at 3.2 per cent, down from 3.6 per cent in the September quarter.
Half an hour after the CPI print was released, Westpac highlighted that the better-than-expected inflation data has shifted the balance of probabilities back in favour of a February rate cut.
The bank, which had previously pushed back its rate cut forecast to May in November, now believes there is “just enough” evidence to suggest disinflation is progressing faster than the RBA had anticipated. As a result, Westpac’s chief economist, Luci Ellis, stated that “the board will have the required confidence to begin the rate-cutting phase in February”.
“Conditional on further declines in inflation and some softening in the labour market, we see cuts in May, August and November, taking the terminal rate to 3.35 per cent,” Ellis said.
Acknowledging the labour market’s surprising resilience, a matter viewed by some as a key deterrent to a February rate cut, the economist said: “In the end though, the good news on inflation beats the stronger news on the labour market.”
She did, however, concede that the RBA could “dig in on their assessment that the demand is still outstripping supply, and keep rates on hold”, but added: “The run of inflation data of late makes such an assessment even harder to justify, though.”
Similarly, AMP, which switched to May from February for the first cut back in late November, announced on Wednesday that prompted by the CPI print, it has once again revised its official forecast.
“We think the RBA will opt to cut the cash rate by 0.25 per cent at the February meeting, taking the cash rate to 4.1 per cent before another 0.25 per cent cut in May and another cut in the second half of the year,” said Diana Mousina, deputy chief economist.
“All up, we expect three interest rate cuts from the RBA this year and we see the cash rate ending the year at 3.6 per cent.”
David Bassanese, chief economist at Betashares, said there’s now a good chance trimmed mean “underlying” inflation could fall back to the RBA’s 2–3 per cent inflation target band by June, rather than the RBA’s current expectation of December.
“There’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings,” Bassanese said.
“I anticipate the Reserve Bank will welcome these inflation results and reward hard pressed households and mortgage holders with an interest rate cut at the February 17–18 policy meeting.”
He expects the RBA to follow up with two further rate cuts this year, likely following confirmation of further declines in inflation following the next few quarterly CPI reports.
ANZ’s senior economist, Catherine Birch, similarly believes the RBA will cut the cash rate by 25 basis points at its February meeting.
The big four bank had recently adjusted its rate forecasts, tipping that the central bank would cut in February instead of the earlier predicted May.
Oxford Economics shared a slightly less popular view, labelling a February rate cut “a line-ball decision” as a result of the “remarkably tight” labour market.
“The upcoming labour force data are the other major piece of new information the RBA Board will have to hand at the February meeting. These will be pivotal to gauge whether the labour market is slackening, and unit labour cost pressures are abating.
“A February rate cut now looks to be a line-ball decision. But even if it does mark the start of the easing cycle, we expect the RBA will take a cautious approach given cost pressures are still strong.”
Similarly, VanEck’s portfolio manager, Cameron McCormack, said that despite the favourable inflation print, the RBA may exercise caution and delay the first cut until the second quarter due to the recent tightening in the labour market and weaker Australian dollar.
“For the RBA to have absolute confidence that core inflationary pressures are under control, we believe there is an outside chance that they may wait to see at least another consecutive CPI trimmed mean quarterly annualised print below 3 per cent (due in April) before making a move,” McCormack said.
Vanguard’s senior economist, Dr Grant Feng, shared this sentiment, declaring that the RBA will not start reducing interest rates until the second half of 2025.
“We remain cautious over how quickly rates will be cut by the RBA and believe the prospect for sharp disinflation this year is limited,” Feng said.
He explained his hesitation with two key reasons: first, the lack of evidence supporting sustainable declines in inflationary fundamentals, and second, the ongoing tightness in the labour market, which could slow the disinflation process.
