Australia’s cooling inflation opens door to early 2024 rate cuts

RBA is sure to maintain its hawkish guidance for a while yet. But it could become one of the first central banks globally to start cutting.

Incoming Reserve Bank governor Michele Bullock.

Australia’s inflation readings continued to cool rapidly for July and should be shifting the conversation in financial markets away from whether the peak in interest rates has been reached, to a far bigger discussion about the timing of coming interest rate cuts.

The monthly consumer-price index rose 4.9 per cent in the 12 months to July, well below the expected rise of 5.2 per cent, and compares with an increase of 5.4 per cent over the year to June, the Australian Bureau of Statistics said Wednesday. The stellar July result compares with a peak in December of an 8.4 per cent increase.

The rapid cooling in prices growth so far in 2023 will already be putting downward pressure on the Reserve Bank of Australia’s recent forecast that inflation will run at a rate of just 4.1 per cent by the end of this year, down from 6.0 per cent in the second quarter.

So dramatic is the capitulation in inflation pressures, it won’t be long before the guns of the media and economic commentators are turned back on the RBA for tightening interest rates too far in the first place.

With Michele Bullock set to become RBA governor in just a matter of weeks, it now looks likely that she will soon be able to start talking about the prospect of reducing interest rates in early next year, instead of the second half of 2024 as most economists currently expect.

Moving the discussion toward the prospect of interest-rate cuts would build confidence around the likelihood of a soft landing for the economy next year, with a widely expected jump in unemployment contained to a large degree.

But more data is needed and the RBA is sure to maintain its hawkish guidance for a while yet. With peers like the Federal Reserve still warning that further interest rate increases are possible, the RBA can’t act too rashly.

Still, if inflation continues to wash out of the economy in the same manner that it has this year, it could be that the RBA will be one of the first major global central banks to start cutting interest rates in 2024.

To be sure, the case to put an end to interest-rate increases has been building for a while, and it isn’t exclusively linked to plunging inflation.

The RBA will holster its interest-rates gun partly because of China’s woefully misfiring economy, and the fact that thousands of Australian households are now feeling the full impact of the 400 basis points of interest-rate increases in the last year.

The strain on household budgets is massive, with amounts devoted to servicing mortgage repayments back at record levels. The RBA is fully cognisant of what this means for average workers on base wages.

There’s also growing evidence that hiring is starting to slow while consumer spending is in retreat amid the worst confidence data seen since a deep and scarring recession in the early 1990s.

The RBA won’t rush to change direction until it has more confidence that wages growth isn’t accelerating and that things like soaring electricity costs won’t see inflation expectations break their moorings.

Perhaps the best indicator of the increasingly relaxed mood of the RBA is that Bullock chose the topic of climate change for a speech delivered on Tuesday to academics in Canberra.

While it’s a topic that is front of mind for all policy makers, the speech lacked the kind of stark warnings about the inflation outlook that the financial markets have grown used to.

Perhaps outgoing Governor Philip Lowe said it best earlier in August when he told parliament that “the worst is over.”

Write to James Glynn at [e-mail]