Inflation data suggest May rate cut is likely – but not a done deal
Quarterly inflation figures have come in slightly higher than expected, but could still make room for an interest rate cut by the Reserve Bank.
UNDERLYING inflation has fallen to 2.9 per cent paving the way for a Reserve Bank rate cut in May.
But higher spending on housing, education and food has prompted economists and analysts to rein in their predictions of a possible 50 basis point cut.
With some saying a rate cut is not a done deal.
The trimmed mean – the RBA’s preferred inflation measure – grew by 0.7 per cent in the March quarter.
That was slightly higher than forecast, pushing the annual figure below three per cent for the first time since December 2021.
Also known as underlying inflation, the trimmed mean excludes or down-weights items with irregular price changes for a more accurate picture of price growth.
Headline inflation grew 0.9 per cent in the March quarter to reach 2.4 per cent on an annual basis for a second straight quarter.
That’s within the RBA’s two to three per cent target range for the third quarter in a row.
The central bank had flagged that its May meeting would be an “opportune time” to revisit its monetary policy setting.
Economists at CBA, ANZ and Westpac expect a 25-basis point rate cut in May, which would bring the cash interest rate down to 3.85 per cent.
“We view an RBA rate cut of 25 basis points in May as a near certainty, given the downside risks to global and domestic growth stemming from global trade policy uncertainty and the inflation outcomes over the past two quarters,” ANZ economist Adelaide Timbrell said.
CBA’s Head of Australian Economics Gareth Aird said underlying inflation supported a 25bp rate cut in May, but added: “It’s not a done deal.
“The inflation data today is essentially in line with the RBA’s forecasts and therefore the Board will consider the prices side of the economy evolving in line with its expectations.
“The case to normalise the cash rate to a more neutral setting remains, but we maintain that the Board will take a gradual approach in cutting rates.”
That’s despite CBA recently downgrading its forecast for the global economy.
He said: “We retain our base case that the pace of easing is likely to be gradual and we continue to expect one 25bp rate decrease each quarter in 2025 for an end year cash rate of 3.35 per cent.”
Former Reserve Bank economist and CBA Chief Economist Michael Blythe said: “Earlier calls for a 50 basis point cut now look foolish … and … a May cut is not the near certainty priced in by financial markets.”
