‘Nothing stopping a rate cut now’: Rate relief firms on CPI reading

Mortgage holders are expected to get some much-needed rate relief in August, but one of Australia’s biggest banks is calling for an outsized rate cut.

Cash-strapped mortgage holders have received welcome news, with Wednesday’s inflation rate opening the door for further rate relief in August.

The trimmed mean annual inflation rate, which strips out volatile items including fuel and food, came in at 2.7 per cent for the 12 months until June, the lowest figure since December 2021, Australian Bureau of Statistics figures show.

For the second quarter in a row, trimmed mean annual inflation fell within the Reserve Bank of Australia’s target range of between 2 to 3 per cent.

Trimmed mean inflation slowed to 0.6 per cent from 0.7 per cent over the June quarter to reach its lowest level since December 2021.

Australians are set to get a rate cut in August. Picture: NewsWire/ David Crosling

With inflation falling to its lowest level in years, Bendigo Bank chief economist David Robertson suggested the RBA monetary policy board should make a larger move on interest rates.

“(Wednesday’s inflation reading) should assure an RBA rate cut in August, and potentially opens the door for a larger cut than the normal 25 basis points,” he said

“While a 50 basis points cash rate cut in August seems unlikely in light of (RBA governor) Michele Bullock’s speech last week around consistency, a 35 basis points cut to the cash rate would take it down to 3.5 per cent – which would be a sensible compromise.”

According to Betashares chief economist David Bassanese, who was one of the few to correctly predict a rate hold in July, said Wednesday’s CPI reading was “good enough” for a rate cut in August.

“Although this is a touch higher than the Reserve Bank’s May forecast of 2.6 per cent – my view is near enough is good enough and an August rate cut now seems a done deal,” he said.

“Underlying inflation is inching closer to the middle of the RBA’s 2 to 3 per cent target band and so justifies a further easing in what are – in the RBA’s own words – a still ‘modestly restrictive’ level of interest rates.”

KPMG chief economist Brendan Rynne said there was nothing stopping the RBA from cutting interest rates now.

“Consumer and business confidence has continued to remain in the doldrums, with households and investors looking for continued rate relief before they open their wallets further,” he said.

“Today’s CPI outcome should therefore give the RBA all the comfort it needs to drop the cash rate at its next meeting on 11-12 August.”

Millions of Aussies will be closely watching the figures released on Wednesday. Picture: NewsWire / Nicholas Eagar

Magic number for August rate cut

Millions of Australian mortgage holders were closely watching the release of Wednesday’s consumer price index, with any inflation figure lower than 0.7 expected to be good news.

Economists say that would put the quarterly trimmed mean inflation rate between 2.6 and 2.7 per cent over the year – within the RBA’s target band of between 2 to 3 per cent – and open the door for further interest rate relief.

Trimmed mean inflation is the figure the RBA pays most attention to in its battle to control inflation.

The RBA’s reading on inflation removes volatile items including food prices for the month. Picture: NewsWire/ David Crosling

On Tuesday, AMP chief economist Shane Oliver said the RBA was looking for further proof inflation had been beaten, with a quarterly figure of between 0.6 or 0.7 likely to sway it to cut the official cash rate after it surprisingly kept it on hold in July.

“A lot comes down to the CPI that comes out on Wednesday,” Mr Oliver said.

“If the CPI is in line or a little bit higher than the RBA’s trimmed mean forecast of 2.6 per cent for the year then I think we will get a rate cut.

“If it is 2.8 or 2.9, then they might think, let’s wait a little while longer.”

Mr Oliver’s forecast comes in line with three of the four major banks, with Westpac, ANZ and the Commonwealth Bank all calling quarterly trimmed mean inflation to come in at between 0.6 and 0.7 per cent.

But due to rounding, CBA has pencilled in an inflation rate of 2.8 per cent.

Any inflation figure lower than 0.7 is likely good news for homeowners. Photo: NewsWire/ Gaye Gerard

CBA economist Harry Ottley, who had been expecting inflation to come in at the top of the range, said in a note this result would come in slightly above the RBA’s recent estimate of 2.6 per cent.

“If our forecasts are correct, we still expect the board to cut the cash rate in August,” Mr Ottley said.

Treasurer Jim Chalmers said regardless of Wednesday’s inflation figures, the cost of living was headed in the right direction.

“Any headline inflation number tomorrow with a two in front of it will confirm that we have been in the Reserve Bank target band for a full year,” Mr Chalmers said.

“Whatever the quarterly fluctuations or monthly fluctuations, the direction of travel when inflation has been clear.

“Both headline and underlying inflation are now back in the Reserve Bank’s target and for the first time since 2021.”

Treasurer Jim Chalmers highlights inflation is falling. Picture: NewsWire / Martin Ollman

RBA governor Michele Bullock said after July’s announcement that the cash rate would be kept on hold at 3.85 per cent was a pause about timing rather than direction.

“All members agreed that, based on the information currently available, the outlook was for underlying inflation to decline further in year‑ended terms, warranting some additional reduction in interest rates over time,” she told reporters.

“The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty”.

CPI is the final piece of the puzzle after a weaker than expected jobs figure. Photo: NewsWire/ Gaye Gerard

Wednesday’s CPI figures will be the last bit of economic data released ahead of the RBA’s August 11-12 meeting.

An inflation print in line with the RBA’s expectation would follow weaker than expected jobs figures released in June.

The unemployment rate rose to 4.3 per cent last in June, beating market expectations of 4.1 per cent, according to the Australian Bureau of Statistics.

Despite the Australian dollar crashing and the sharemarket jumping on the news, Ms Bullock said it wasn’t the “shocking result” markets were calling during her speech at the Anika Foundation.

“Some of the coverage of the latest data suggested this was a shock – but the outcome for the June quarter was in line with the forecast we released in May,” she said.

Ms Bullock said the board wanted to see a gradual easing in labour market conditions, that has so far been most evident in fewer job vacancies, reductions in hours worked and declining rates of voluntary job switching.

“These shifts aren’t without their challenges, but they all tend to be less disruptive than outright job losses,” she said.