Inflation bombshell to shift rate cut horizon
New inflation figures are likely to radically change the outlook for when Aussies can next expect a change in interest rates.
Homeowners could be set for further relief as new inflation data opens the door for another imminent interest rate cut.
The latest monthly Consumer Price Index (CPI) indicator showed inflation over the year to February was 2.4 per cent, lower than the January indicator at 2.5 per cent.
Annual trimmed mean inflation, which excluded the annual fall in electricity, alongside other large price rises and falls, was 2.7 per cent in February, down from 2.8 per cent in January.
The figure is within the target band of the Reserve Bank of Australia and will give the central bank food for thought ahead of its next board meeting in April.
This comes as Treasurer Jim Chalmers said in his Tuesday Budget speech that the government expected inflation would be back in the RBA’s target band six months ahead of expectations.
CPI has now been within the inflation target of 2-3 per cent since September.
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REA Group Senior Economist Angus Moore said that lower inflation could tip the RBA towards cutting rates sooner, and by more, but he ruled out a cut as early as April, eyeing May as more likely cutting point.
“We’re unlikely to see a cut at the (April RBA board meeting), but we are still expecting to see at least a couple of further cuts across this year,” he said.
“The main reason the RBA is being cautious is that the unemployment rate remains extremely low and the labour market is very tight.”
Ray White Group chief economist Nerida Conisbee said despite inflation levels remaining low, global uncertainty would likely mean the RBA would hold rates in April, but a cut in May remained a strong possibility.
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“Inflation would have to be extremely low for them to cut rates in April,” she said.
Ms Conisbee said it was likely the RBA would want to wait until further inflation data became availabe in May before cutting again.
“The big problem at the moment is there is so much uncertainty with tariffs in the US and a potential recession,” she said.
“Good news is that they haven’t decided to do reciprocal tariffs, however we don’t know how China will respond to the tariffs and how that could affect our economy.”
Finder.com.au head of consumer research Graham Cooke said monetary policymakers will be waiting for the quarterly data, due to be released at the end of April.
“The main inflation figure and the trimmed mean inflation figure will need to hold or reduce for us to see another rate cut,” he said.
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“If the trimmed mean figure, in particular, comes in at 3 per cent or below, this will show the economy is on track, and more relief for householders is more likely.
“The monthly data, however, is an early indicator of what we may expect. We did see slight upticks between December and January, with the monthly trimmed mean figure rising from 2.7 per cent to 2.8 per cent, however the main CPI figure remained steady at 2.5 per cent. Downward movement here would also be a positive sign that inflation is being brought further under control, and would make a cash rate cut in May more likely.
“The monthly figures are less comprehensive than the quarterly data, hence the RBA will likely wait until next month to make the call.”
My Housing Market chief economist Andrew Wilson said the main factors pushing inflation lower were still holding.
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“Specifically oil prices have continued to lower, housing prices are lower and continuing to ease with building costs and some relief over strong rental increases,” he said.
“We are not getting the same level of discount of electricity prices after last year’s budget announcement of the hand out to households,” he said.
“Putting that all together, the inflation rate is likely on those measures at least stay steady or even decline.”
Despite this, he expected the RBA wouldn’t drop rates until May.
“The RBA have clearly stated its looking more closely at the quarterly results and they wont come out until the May meeting,” he said.
“Even though it was wildly expected they would cut rates at its last meeting, the circumstances are we still have a robust economy,” he said.
“In case we do start to get some sort of a downturn, with the issues of international trade at the moment. There are some very early question marks until that quarterly data.”
Real Estate Institute of Australia President Leanne Pilkington noted that the monthly CPI excluded the volatile items of fruit and vegetables, automotive fuel and holiday travel and accommodation.
“Even allowing for the volatility of monthly CPI figures they are consistently trending down towards the RBA’s target range and are reflecting the Budget forecast of 2.5 per cent inflation for 2024/2025,” she said.
The most significant price rises at the group level were housing (up 1.8 per cent), food and non-alcoholic beverages (up 3.1 per cent) and alcohol and tobacco (up 6.7 per cent), she added.
“Rents increased by 5.5 per cent in the twelve months to February, down from a 5.8 per cent rise in January, and the lowest twelve month increase since March 2023, reflecting increased vacancy rates across most capital cities,” Ms Pilkington said.
“The figures support market expectations of further rate cuts during 2025 which would provide additional relief for borrowers following the cut in February and improve affordability. “Together with the Budget forecasts of increased dwelling investment over the next three years, suggests some long overdue optimism.”
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Originally published as Inflation bombshell to shift rate cut horizon
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