Interest rate cut ‘pretty much locked in’ after inflation slows, experts say

Economists say an interest rate cut next month is all but locked in and the Reserve Bank of Australia would find it ‘hard to justify’ another hold after latest figures showed slowed inflation.

Economists say an interest rate cut next month is all but locked in and the Reserve Bank of Australia would find it ‘hard to justify’ another hold after latest figures showed slowed inflation.

New inflation data from the Australian Bureau of Statistics released on Wednesday showed the consumer price index (CPI) rose by 2.1 per cent over the year to June, slowing from 2.4 per cent in the March quarter.

The annual trimmed mean, the Reserve Bank of Australia’s (RBA) preferred measure of underlying inflation, was 2.7 per cent to the June quarter, down from 2.9 per cent in the previous quarter.

It was at its lowest since December 2021.

Oliver Hume chief economist Matt Bell said the result, which was within the RBA’s target inflation range of 2 to 3 per cent, would be in line with a rate cut in August.

He added the data was “great news for mortgage holders and home buyers”, after the RBA went against market expectations for a rate cut in July and instead maintained the rate at its current 3.85 per cent.

“Many households were bitterly disappointed with the decision to leave rates on hold... with the RBA deciding to wait for today’s inflation release before moving again.

“Markets were pricing in 92 per cent chance of a cut at the next meeting on August 12. Today’s data pretty much locks that cut in.”

AMP chief economist Shane Oliver said another hold on the cash rate was unlikely to occur again.

“I think it keeps the RBA on track to ease [the cash rate] at their next meeting,” Dr Oliver said.

“They wanted to get more information confirming that their forecasts were on track and that particularly related to jobs and inflation.

“We’ve now had that information, the jobs numbers we expected and now we’ve got the inflation numbers coming in roughly in line with the expectations.

“They could always surprise us again but I think that would be very hard to explain to the Australian public.”

He added the RBA board would also watch global developments ahead of their meeting, which seemed “neutral”.

“The big threat there has been tariffs. That threat remains, but it’s not the worst case scenarios we were seeing back in April.”

Deloitte Access Economics Partner Stephen Smith said the current cash rate was “restricting growth”.

“This is hard to justify given ongoing global economic volatility and the continued sluggishness of our own domestic economy.”

RBA Governor Michele Bullock is facing increasing pressure to cut interest rates. Picture: NewsWire / Nikki Short

CreditorWatch Chief Economist Ivan Colhoun said the lower-than-expected rise was “a green light for the board to further reduce interest rates by 0.25ppts to 3.6 per cent”, he said.

“(The data) also suggests the board will continue its gradual and cautious approach to easing policy, meaning a further interest rate reduction before November is unlikely unless the unemployment rate continues to rise.

“Businesses and consumers are both likely to welcome a further interest rate reduction by the RBA. This will likely provide some support to confidence as US trade and tariff policies act to slow US and global economic growth in the year ahead.”

The most significant inflation rises over the quarter included housing, where the consumer price index rose by 2 per cent from the year before.

Food and non-alcholohic beverages had increased by an average 3 per cent, while health was up 4.1 per cent.

Transport was the only category with a drop, down by 2.6 per cent from the year before.

Meanwhile, Professor John Quiggins from the University of Queensland said inflation growth was on a downwards trajectory and was at risk of breaking below the RBA’s target range.

“If we have a downward shock in the next quarter, we could fall below 2 per cent, which is repeating the mistakes the bank made in the lead-up to the pandemic.

Interest rates should be cut after the latest inflation data. Photo: Supplied

“I think the risk they take is we could see both below target inflation and a downturn in the economy, in which case, the decision-making over the past year or so would look pretty bad.”

SQM Research founder Louis Christopher said the new inflation data ‘swings the pendulum’ toward an RBA rate cut next month and if inflation dropped below the board’s preferred target band, they would ‘have egg on their face’.

Originally published as Interest rate cut ‘pretty much locked in’ after inflation slows, experts say