RBA interest rate relief at closest point since pandemic

A better than expected fall in inflation means the Reserve Bank may consider an interest rate cut for the first time since February 2020.

RBA Governor Michele Bullock. Picture: NewsWire / Jeremy Piper

Struggling households are at the closest stage yet to receiving mortgage relief from the Reserve Bank than at any stage since the start of the Covid-19 pandemic five years ago following a better-than-expected decline in inflation.

The Australian Bureau of Statistics on Wednesday reported that the trimmed mean Consumer Price Index (CPI) indicator, the Reserve Bank’s preferred measure, dropped to 3.2 per cent in the year compared to 3.3 per cent forecasted by markets and below the 3.4 per cent expected by the RBA.

Headline inflation also fell by more than expected to 2.4 per cent in the year to December compared to 2.5 per cent financial markets had expected.

Inflation is now at its lowest period since 1.1 per cent in March 2021.

This sets up the prospect that when RBA governor Michele Bullock and her fellow board members meet in three weeks they will consider cutting interest rates for the first time since November 2020.

Financial markets are taking that view too, having priced in a 75 per cent chance of a 0.25 percentage point rate cut at the February meeting, which would take the official cash rate to 4.10 per cent. Commonwealth Bank, Westpac and ANZ all see rate cuts next month too.

More importantly, the rates market is pricing 0.85 percentage points of rate cuts for 2025, which would see the RBA’s official cash rate end the year at 3.50 per cent.

Stubborn inflation and the most aggressive rise in interest rates ever have hurt households by leaving little left in the budget to spend on non-discretionary items which has in turn resulted in record insolvency rates for businesses as cafes and hospitality venues go under.

The big sticking point for the RBA has been that inflation needed to “sustainably” get back down to target range and stay there. The number for December could just be the turning point.

“Sustainably means that we’re getting there and we’re staying there,” Ms Bullock said in September. “Sustainably is that we need to see that there’s a consistent trend down to the band and it’s going to stay in the band rather than dip in and out.”

In December, the RBA judged that the upside risk to inflation had diminished, but that it was too soon to conclude with full confidence that inflation was moving sustainably towards target.

The RBA is one of the remaining holdouts among global central banks; the trend for rates is starting to come down. Canada, New Zealand and the UK have all reduced interest rates, while the US has done so too, but warned of fewer rate cuts than previously guided in 2025.

While Prime Minister Anthony Albanese and Treasurer Jim Chalmers will be quick to claim credit for any rate cut and that inflation has fallen, much of that has been artificially lowered by generous energy subsidies to offset expensive power bills.

The 2024-25 Commonwealth Energy Bill Relief Fund rebates pushed electricity prices down by 25.2 per cent as households received a $300 credit to their bill. The ABS says that power prices fell 9.9 per cent alone in the December quarter alone, but would have lifted 0.2 per cent without the scheme.

Conveniently those schemes end on June 30 – a month after the May deadline for an election. The RBA has warned that while the scheme has helped to lower inflation, the end of the program will see inflation spike in the back half of the year.

Its latest Statement of Monetary Policy released in November showed that headline inflation will fall to 2.5 per cent in June, but end the year at 3.7 per cent – well outside its target band of 2-3 per cent. Trimmed mean inflation will continue to ease to 3 per cent by June and 2.8 per cent in December before only reaching the midway point of its target in December 2026.

Some analysts have warned that the end of the Energy Bill Relief Fund could have households slugged with a 47 per cent rise in out-of-pocket electricity costs.

While Australia is firmly on the path to a rate cut, the fight against inflation is far from over.

Originally published as RBA interest rate relief at closest point since pandemic