US inflation falls again, but don’t expect the RBA to cut rates just yet

The RBA will signal to the market that the fight against inflation is largely won, and its response may surprise some.

Australian homeowners are unlikely to get the Christmas present they were hoping for from the Reserve Bank, with rates likely to be held on hold, although economic conditions might support an outsized rate cut in February, economists predict.

US inflation cooled to 2.4 per cent in September 2024, according to consumer price index data released by the Labor Department on October 10.

This meant that inflation had hit a three-year low in September, although the figure came in higher than the 2.3 per cent economists had predicted.

While the US rate of inflation has spurred chatter of an Australian rate cut, independent economist Saul Eslake told NewsWire the Reserve Bank of Australia (RBA) was unlikely to follow the Federal Reserve (the Fed) in the US.

“The Reserve Bank makes its decisions by reference to what it thinks will happen in Australia and it doesn’t follow the Fed. It hasn’t really followed the Fed in a number of decades,” Mr Eslake said

Struggling homeowners are hoping the RBA follows the Federal Reserve and slashes interest rates.

Mr Eslake predicts the central bank will wait for December’s economic data to be released.

Governor Michelle Bullock is unlikely to follow the Federal Reserve and cut rates until Australian conditions meet the RBA’s criteria for a rate reduction. Picture: NewsWire / John Appleyard

“I think the first cut will come (in February) and it might be 50 basis points when it comes. The reason for that is partly because that is what the Fed did and partly because the first four increases in Australia were 50 basis points,” Mr Eslake explained.

“That is a powerful way of saying our focus is shifting. So once they are confident that inflation is back within the target range, they can afford to say to the economy, businesses and households that the battle on inflation has largely been won and now we are shifting our focus to preventing any unnecessary increases in unemployment or weakening in economic activity.”

A larger rate cut could help spur on consumers and businesses, knowing the fight on inflation has largely been won. Picture: NewsWire / Kelly Barnes

While it is a larger rate cut than the market is forecasting, Mr Eslake says it might just be a case of timing.

“The market is expecting a 25 basis point cut in December and February, my view is they will just do it all in one go,” he said.

Inflation relief for families

Despite the RBA being unlikely to cut the cash rate when it meets in November, there is a silver lining for Australian consumers.

If the Federal Reserve, which began cutting rates in September, continues and the Australian central bank holds the national cash rate, it is likely the Australian dollar will strengthen.

Inflation could fall if the Australian dollar appreciates against the US greenback Picture: NewsWire / Gaye Gerard

“It will help with the cost of living. It makes imports cheaper but also on the margin reduces the impact for exporters,” Mr Eslake said.

“It is not huge, but it is at the margin (that the RBA) will see as helpful. This is a tightening of financial conditions.

“They would regard an upward movement in the Australian dollar which could result from them doing something different with interest rates to what the Fed is doing.”