Chances of February rate cut increase on inflation data
Core inflation fell to 3.2 per cent in the year to December, which is its lowest level since 2021 - putting pressure on the RBA to cut rates.
ALL eyes will be on Michele Bullock and the RBA after inflation came in at its lowest level since 2021.
Core inflation fell to 3.2 per cent in the year to December, opening the door for the Reserve Bank of Australia to cut the cash rate at its next meeting.
The trimmed mean, which is the central bank’s preferred measure of inflation, grew 0.5 per cent in the December quarter, the Australian Bureau of Statistics reported on Wednesday.
Also known as underlying inflation, the trimmed mean includes items with the largest price changes at either end to show a less volatile reading of price growth.
With headline inflation below the mid-range of the RBA’s 2-3 per cent target band, Treasurer Jim Chalmers had reason to be optimistic that mortgage relief was in sight.
“On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said.
“The soft landing we have been planning and preparing for is looking more and more likely.
“The worst of the inflation challenge is well and truly behind us.”
The scene is now set for the RBA to cut rates at its next meeting in February.
CBA Head of Australian Economics Gareth Aird (above) said: “Restrictive monetary policy has done its job in pulling underlying inflation back toward the RBA’s target band.
“GDP growth is well below trend and wages growth has slowed more materially than the RBA forecast.
“We believe today’s data has given the green light for the RBA to commence normalising the cash rate at the February Board meeting with a 25bp rate cut – in line with our base case, which we have held since late October 2024.
“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.”
IG markets analyst Tony Sycamore (above) said: “After another decisive step lower inflation is within sight of the RBA’s 2-3 per cent target range and well below the RBA’s 3.6 per cent forecast in the November statement of monetary policy,” he said.
The rates market had been pricing in a 63 per cent chance of a cut in February ahead of the inflation figures release.
The market repriced the chance to more than three-quarters following the announcement.
“More importantly, the rates market is pricing 85 basis points of rate cuts for 2025, which would see the RBA’s official cash rate end the year at 3.5 per cent,” Mr Sycamore said.
That’s slightly more than the 75 basis points of cuts predicted by Deloitte Access Economics in a report released ahead of the inflation data.
Even if that comes to pass, Australians have suffered a sharp fall in living standards which aren’t likely to return to pre-pandemic levels until 2030, it said.
