Inflation falls in Australia, signalling the possibility of further rate cuts

Any rate cuts would be a welcome relief to mortgage holders and investors alike

Inflation falls in Australia, signalling the possibility of further rate cuts

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Inflation continues on a downward trend in the land Down Under, signalling the possibility of further rate cuts by the Reserve Bank of Australia (RBA). 

The bank has previously said it is targeting an inflation rate between 2% and 3% before it will cut rates. Then on Wednesday, the Australian Bureau of Statistics released its Consumer Price Index (CPI), showing quarterly results for both the CPI and trimmed mean inflation rates, the latter having dropped to a new low of 3.2%. 

"The latest trimmed mean inflation print will be enough for the RBA to cut rates in February," Adelaide Timbrell, senior economist at ANZ, told Australian Broker. "The annualized trimmed mean inflation over the last six months is within the RBA's target band."

For the December fourth quarter, the CPI rose 0.2%, compared with September's third quarter reading, driven by higher alcohol and tobacco, as well as recreation and culture prices. Housing prices fell 0.7% during the three-month period. For the year, the CPI rose 2.4%, down from 2.8% at its last quarterly reading, thanks to lower electricity and gasoline prices, as well as softening price rises for new dwellings, the report said. Alcohol and tobacco, education, and insurance and financial services had the highest annual price hikes, all over 5%, while transportation costs fell 1.5% and communications remained flat. Housing rose 1% for the year. 

Meanwhile, the "trimmed mean" – which measures underlying inflation by stripping out goods with volatile price changes and what Timbrell said is a more important barometer for inflation – fell to 3.2%, down from 3.6% in the September third quarter. 

"We believe inflation is sufficiently slow for the RBA to cut rates," Timbrell said. "The price pressures causing inflation have slowed down enough due to slower economic momentum over 2024.” 

ANZ is anticipating a 25 basis point reduction in the official cash rate during the RBA's Feb. 17-18 meeting. 

Any rate cuts would be a welcome relief to mortgage holders and investors, as Australia's higher-for-longer cash rate has been on hold at 4.35% since November 2023. 

Three of the nation's big four banks – ANZ, Commonwealth Bank and Westpac – are predicting rate cuts during the RBA's meeting next month, while NAB is placing its bets on May 2025. 

Following the release of the CPI, Westpac’s chief economist, Luci Ellis, wrote in a note that "the better-than-expected inflation data tips the balance back to the February move we had previously expected.”

"We have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected," Ellis said. 

Other factors at play include unemployment, which is currently low at 4%, when compared with historical averages. A low unemployment rate could be a reason for the bank to hold off on cuts. However, slowing wage rises are another sign that the RBA will likely cut rates next month, according to Ellis. 

“In the end though, the good news on inflation beats the stronger news on the labour market," Ellis wrote.

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