Too soon to rule out another interest rate rise by the Reserve Bank

Australia’s monthly inflation data reinforces the argument for interest rates to be cut in the second half of 2024 but some economists still expect another rise next month.

Australians are feeling the pressure of rising inflation costs at supermarket check-outs where the price of fresh produce has noticeably risen. Picture: Tertius Pickard

The latest monthly inflation data supports calls for interest rate cuts in the second half of the year, but some economists still expect the central bank to deliver a final rate rise next month.

As was the case overseas last year, Australia’s monthly CPI indicator for November undershot expectations with a near two-year low annual rate of 4.3 per cent.

The monthly CPI has almost halved from a post-Covid peak of 8.4 per cent. For the first time since the first half of 2022, underlying inflation measures including annual trimmed mean inflation and the monthly CPI indicator excluding volatile items and holiday travel are below 5 per cent.

While still well above the RBA’s 2-3 per cent target, the monthly inflation data suggests December quarter CPI data at the end of the month could also undershoot expectations.

If so, the RBA may conclude that inflation will fall back to the midpoint of its target band in a “reasonable time frame” without the need for higher interest rates.

The CPI data came as job ­vacancies fell for the sixth quarter in a row, suggesting the jobs market is cooling.

“Both data points are consistent with the RBA on hold in February and rates having peaked,” AMP head of investment strategy and chief economist Shane Oliver said.

“Our view remains for the RBA to start cutting rates from June, taking the cash rate down to 3.6 per cent by year end.”

Market pricing that implied the RBA would ease monetary policy in August and December – cutting its cash rate target to 3.85 per cent, versus the current level of 4.35 per cent – was little changed.

IG market analyst Tony Sycamore said the fall in underlying inflation measures “confirms that the disinflation narrative remains firmly in place” and supports expectations of RBA rate cuts this year.

“If December quarter inflation data paints a similar picture there is a good chance that expectations of the RBA’s first rate cut are brought forward to June, with a third rate cut added into the rates market for 2024,” Mr Sycamore said. December employment data is due on January 18.

ANZ noted that three-month annualised underlying inflation had almost reached the RBA’s target band. With quarterly CPI likely to be annualising within the RBA’s 2-3 per cent target band in the second half of the year, the RBA could start a “shallow easing cycle to start in late 2024”.

CBA saw rate cuts starting in June as it expected the RBA to view the monthly CPI indicator as an “undershoot relative to their forecasts from November”.

“Domestic inflation pressures generally look to have eased further,” CBA economist Stephen Wu said. “Various market services showed disinflation, for instance with annual rates of inflation for meals out and household services continuing to ease.

“However, rents inflation remained strong, consistent with low rental vacancy rates, and insurance premiums continued to rise very strongly, notching a record high 16.2 per cent on-year, and reflecting still‑elevated building costs as well as weather events.”

Market services items showing signs of disinflation would be “welcome news for the RBA”, which has called out “homegrown and domestic demand” driven inflation, Mr Wu added.

Housing appears to be the category most likely to slow the ongoing decline in inflation, with rental vacancy rates remaining low, housing construction costs picking up again, and the waning effect of government credits on electricity prices.

Westpac senior economist Justin Smirk said that while dwelling and rents may still be of concern to the RBA, the household services prices had risen less than expected.

“The second month of the quarter provides us with an update for most of the quarterly surveys of household services and in this regard the overall tone for household services inflation was softer than expected outside the sizeable jump in insurance premiums,” Mr Smirk said.

But a final RBA rate rise next month remains likely as services inflation “remains stubbornly high”, according to Citi Australia senior economist Faraz Syded.

He said the RBA may use its ­liaison feedback around discounting in household goods in the ­November and December sales period to suggest that the economy was headed for a soft landing.

But whereas the market now saw no chance of a rate rise next month, Mr Syed said it was still a more than 50 per cent chance, ­especially if service prices in ­December remained elevated, as he expected.

NAB senior economist Taylor Nugent said a February rate rise would “better balance the risks around the return to at-target inflation in a reasonable time frame”, but the November CPI data alone would not push the RBA to lift rates again.

“Much will depend on the degree of comfort the RBA board has for the trajectory of inflation and the path back to the 2-3 per cent midpoint,” Mr Nugent said.

“In this respect, regardless of the February decision, nothing in the monthly CPI data supports rate cuts as early as the first half of 2024.”

Indicators from the services and non-tradeable parts of the CPI basket were “unlikely to give the all clear on domestically generated pressure even as they begin to slow,” Mr Nugent said.