By Shane Wright and Millie Muroi
Prime Minister Anthony Albanese could be delivered an interest rate cut within the month, giving him the chance to run to an April election on the government’s economic record, after the nation’s inflation rate fell to its lowest level in more than three years.
Financial markets and most economists believe the Reserve Bank will use its February 17-18 meeting to cut official interest rates by a quarter percentage point after inflation dropped to 2.4 per cent.
On a $600,000, 30-year mortgage, a quarter percentage point cut would deliver a $100 saving on monthly repayments.
It’s the lowest inflation result since the March quarter of 2021 and better than what had been expected by the Reserve Bank. The closely watched measure of underlying inflation rose by 0.5 per cent in the quarter, the lowest rate since mid-2021, taking the annual to 3.2 per cent.
In an election that will be dominated by cost of living issues, a rate cut in February – with the outside chance of a follow-up cut at the RBA’s April 1 meeting – gives Albanese the opportunity to go the polls on April 5 or 12.
Albanese would not be drawn on whether he would go to an April election because of a possible interest rate cut, saying he was pleased to see inflation pressures easing.
Inflation for the December quarter was at its lowest level for three years.Credit: Eamon Gallagher
“What we’re seeing here is inflation is going down, wages are going up, while employment is being maintained with low unemployment. I think that trifecta of lower inflation, higher wages and low unemployment is a good outcome for our country,” he said.
Treasurer Jim Chalmers said inflation was now in the middle of the RBA’s target band with better than expected figures showing the country was making meaningful and substantial progress in the fight against inflation.
“What we’ve seen play out in other countries is that you have to pay for much lower inflation with much higher unemployment. Australia has shown that there is a better way to go about it. We’re seeing the fruits of some of those efforts in the inflation numbers today,” he said.
Australia’s underlying inflation rate is now in line with most other major economies including the United States (3.2 per cent), Britain (3.3 per cent) and Germany (3.1 per cent).
The monthly measure of underlying inflation, which was also released on Wednesday, suggests prices will continue to ease. It fell to 2.3 per cent in December after reaching 4.4 per cent in May.
But shadow treasurer Angus Taylor said Australia was at the “back of the pack” when it came to bringing down inflation, arguing people and businesses were suffering from cost pressures and falling living standards.
“Now, we see the inflation out today and we see that core inflation is stubbornly above target. Services inflation is stubbornly above 4 per cent. It hasn’t moved much in the last 12 months and underneath that is a situation where Australians continue to pay more at the check-out,” he said.
Opposition leader Peter Dutton, in Alice Springs for a local event, said he “didn’t think the government’s got too much to crow about”.
“People are selling their homes because they can’t keep up with more payoffs,” said Dutton. “People are taking items out of their grocery basket and … when they get to the supermarket checkout because they can’t afford to pay for everything in the basket.”
The Australian Bureau of Statistics reported price growth easing across most parts of the economy. New home building costs, which during the pandemic were growing at 20 per cent, fell by 0.2 per cent in the quarter with the annual rate now 2.9 per cent.
Government subsidies contributed to a 9.9 per cent fall in electricity prices, while rents rose by a subdued 0.6 per cent due to the increase in Commonwealth Rent Assistance.
Prices fell in a range of other areas. Fruit prices fell by 3.4 per cent in the quarter, the costs of pets dropped by 2.8 per cent, carpets were down by 0.7 per cent while milk eased by 0.6 per cent. The costs of oils such as olive and sunflower fell by 0.4 per cent after climbing by 50 per cent since the start of the Ukraine war.
Credit: Matt Golding
In mid-2022, the prices of almost 80 per cent of goods and services tracked by the bureau of statistics were growing by at least 3 per cent. Wednesday’s figures showed almost half of all are now growing by less than 2 per cent.
However, an ongoing pressure on households has been soaring insurance prices. The bureau noted another 1.1 per cent in the quarter, but it was the smallest quarterly increase since mid-2022. Over the past year, financial service prices have climbed by 5.4 per cent, due largely to an 11 per cent jump in insurance costs.
The figures prompted financial markets and economists to shorten the odds of an interest rate cut
Westpac’s economics team, which had expected the RBA to cut interest rates at its May meeting, now believes the bank will move in February.
“The better-than-expected inflation data tilts the balance of probabilities back in February’s favour,” Westpac chief economist and former RBA assistant governor Luci Ellis said.
The Commonwealth Bank’s head of Australian economics, Gareth Aird, said it was now clear the RBA’s string of interest rates increases had brought inflation under control.
He noted that prices for government services linked to the consumer price index would grow more slowly through the rest of this year because of better than expected inflation results of the past six months.
“The RBA will be encouraged by today’s CPI data. And we think it will be deemed as sufficiently good for the board to conclude at its February meeting that it is time to take monetary policy towards a more neutral setting by cutting the cash rate,” Aird said.
But KPMG chief economist Brendan Rynne cautioned a rate cut next month was not a done deal, noting core inflation was still above the RBA’s target band.
“The RBA wants to see inflation sustainably within the target band and we are just not there yet. Assuming core inflation continues to fall over the coming months we believe that the RBA will be in a position to cut rates in May, with April a possibility,” he said.
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