THE PRACTITIONER'S COMPANION
Wednesday 6 November 2024

Inflation at lowest level in three-and-half years but rate cuts unlikely until 2025

Under market expectations mark the lowest rate of headline inflation since March 2021 - but it’s unlikely to persuade the Reserve Bank to bring forward any rate cuts.

3 min read
RBA Governor Michele Bullock. Photo: Steven Markham.

ANNUAL headline inflation fell to 2.8 per cent in the three months to September – from 3.8 per cent in the June quarter, the ABS said

The lower than market expectations mark the lowest rate of headline inflation since March 2021, when measured on a quarterly rather than monthly basis.

But it’s unlikely to persuade the Reserve Bank to bring forward any rate cuts, according to a raft of economists including those at the Commonwealth Bank who had been predicting a December cut until these latest numbers.

And the level of consumer spending between now and Christmas could push the widely expected February rate cut further out.

IFM Investors chief economist Alex Joiner said: “With inflation matching the RBA’s expectations it is unlikely to alter its near-term policy approach.

“Given the strength of the labour market, we don’t foresee any possibility of a rate cut this year.

“While February easing is currently the consensus, further disinflationary progress and/or weakening activity data and labour market indicators would likely be needed to shift the RBA from its neutral stance within this relatively short timeframe.

“This suggests to us that the risks to a February easing might be pushed out to April or May, bringing the Federal election into the RBA’s considerations.”

EY’s Chief Economist Cherelle Murphy said Australia is unlikely to see a rate cut this year, which is what most were already forecasting.

“I think come the first quarter of next year, as long as those underlying inflation numbers continue to dissipate the RBA will be able to start cutting,” she said.

Economist Saul Eslake said: “The RBA isn’t going to get the required degree of confidence that underlying inflation is heading back to the target range until it sees the December quarter CPI, which will be released on 29th January  – a week before the first RBA Board meeting for 2025.

“Depending on how good the December quarter CPI numbers are then the RBA’s first rate cut in February could be 50 basis points, rather than 25.

“The next two monthly CPI numbers, due on 27th November and 8th January, could provide some additional insights into that.”

Oxford Economics Australia head of macroeconomic forecasting Sean Langcake agreed, saying: “The RBA will largely ignore the impacts of subsidies when weighing up interest rates next week.

“The team remain of the view cuts won’t start until the second quarter of 2025.”

VanEck portfolio manager Cameron McCormack had the same sentiment.

“The battle against inflation is far from over, pushing out any hopes of a rate cut until well into next year,” he said.

“Despite today’s announcement indicating inflation has fallen within the target range at 2.8 per cent, the RBA has specified on numerous occasions that it will not be persuaded by temporary measures that artificially lower the headline inflation figure. In this case, the government’s energy rebates.”

But State Street Global Advisors says the lower-than-expected inflation data will cause the RBA to change its tune on interest rates.

Economist Krishna Bhimavarapu said there were several positives backing his belief that should persuade the RBA to make a cut.

“Delaying such a pivot might get the economy socked with prolonged below par growth rate,” Bhimavarapu added.

RSM Australia economist Devika Shivadekar said: “Consumer spending is now pivotal for both the RBA and businesses alike.

“As we approach the year-end, upcoming retail events like Black Friday, Cyber Monday and Christmas present prime opportunities for elevated spending.

“Whether the trifecta of easing inflation, government subsidies and tax cuts, and major sales will drive demand to a level that prompts the central bank to further delay its rate cut is still uncertain.

“For now, we anticipate the easing cycle to commence in Q1 2025 of 2022.”

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