Tax cuts pose risk to winter of rates relief

Interest rates could begin falling from June after inflation plunged to a two-year low, but a leading economist warned the rewrite of stage three tax cuts risks delaying rate relief.

Inflation has plunged to a two-year low of 4.1 per cent. Picture: AAP

Interest rates could begin falling from June after inflation plunged to a two-year low of 4.1 per cent, but a leading economist warned Anthony Albanese’s rewrite of stage three tax cuts risked delaying relief for mortgage holders until later in the year.

Financial markets predict the 4.35 per cent Reserve Bank cash rate will be cut by the middle of the year, after December quarter data showed a higher-than­-expected decline in annual inflation from the 5.4 per cent recorded in September.

The sharemarket rose to a ­record 7680.7 points on the back of the inflation numbers released on Wednesday, with the market expecting Australians to receive relief on mortgage repayments just as stage three tax cuts flow through to pay packets from July 1.

AMP Capital chief economist Shane Oliver said he expected three rate cuts this year, starting in June. But he said there was a risk the rewrite of the stage three tax cuts – which are skewed towards lower-income workers who spend more of their pay – would delay interest rate reductions until ­August.

“It might delay the RBA but the impact won’t be instantaneous,” Dr Oliver said.

“The (tax cut) will be spread out over the course of the next 12 months so the impact will become more slowly apparent. But that is obviously a risk.”

Jim Chalmers said price growth had “come off really substantially” since the peak in late 2022, but declared there was still a need for Labor to push ahead with its broken promise to change the stage three package and provide cost-of-living relief for low and middle-income earners.

“Inflation has come off really substantially. But we need it to moderate further and even faster, because we know that people are still under pressure,” the Treasurer said.

“We’re making welcome and encouraging progress in this fight against inflation. But the reason the tax cuts are so important is because people still need relief from these cost-of-living pressures.”

With cost-of-living concerns likely to ease ahead of the next election, due in 2025, opposition Treasury spokesman Angus Taylor said voters were better off ­before the Coalition lost office in 2022. “There’s no plan to get back to where we were when we were in government, absolutely none whatsoever,” Mr Taylor said on Wednesday.

“And this is the problem with Labor. At the end of the day if you want everyone to be better off, you’ve got to manage the economy the right way and this is what Labor’s failing to do and the results are clear.”

Ahead of the Reserve Bank board’s first meeting of the year on Tuesday, Australian Bureau of Statistics data showed consumer prices lifted just 0.6 per cent through the final three months of 2023 – the smallest increase in nearly four years – and half the 1.2 per cent rate in the September quarter. The consensus among economists had been for annual consumer price growth to drop to 4.3 per cent.

Westpac chief economist Luci Ellis said the latest consumer price report capped a series of weak data releases over recent months, including soft labour and retail sales figures, that had “sealed the deal” for rates to stay on hold.

“The RBA will keep the cash rate on hold next week, and it is unlikely to raise rates further this cycle,” Dr Ellis said.

There was even better news in the more timely – if less complete – monthly figures, which showed inflation plunged to 3.4 per cent in the year to December, from 4.3 per cent in November.

Financial markets were pricing in a nearly 90 per cent chance of a rate cut by mid-2024, according to NAB, with Capital Economics economist Abhijit Surya predicting the cash rate could drop to 4.1 per cent as soon as May.

The biggest price increases in the December quarter were a 7 per cent jump in tobacco, a 3.9 per cent increase in domestic holiday costs, and a 1.5 per cent rise in the price of newly built homes.

Rents increased by a relatively subdued 0.9 per cent in the September quarter, versus 2.2 per cent in the prior period, as the Albanese government’s 15 per cent boost to Commonwealth Rent Assistance from September 20 flowed through the ABS’s official numbers. Still, rents were 7.3 per cent higher than a year earlier.

Food prices continued to rise at a brisk 4.5 per cent in the December quarter, albeit down from 4.8 per cent in September and much lower than the peak annual increase of 9.2 per cent in the final three months of 2022.

There was also better news for motorists, with petrol prices dropping by 0.2 per cent through the quarter, albeit with some volatility. The average of unleaded 91 reached as high as $2.13 in early October, before hitting a low of $1.78 in mid-December.

Goods inflation again fell sharply, from 4.9 per cent in September to 3.8 per cent in the latest numbers.

Some economists remain cautious about the rate-cut trajectory. EY chief economist Cherelle Murphy said mortgage holders hit by 13 interest rate rises in 18 months could “breathe a sigh of relief”. But she said there were still risks to the inflation outlook and that the central bank would not rush into cutting rates.

“Mortgage holders will need to remain patient,” Ms Murphy said.

As economists at investment bank Barclays brought forward their forecast timing for a first rate cut by three months to the September quarter, ANZ senior economist Catherine Birch said price growth remained too firm for RBA governor Michele Bullock to abandon her cautious messaging that further policy tightening may still yet be needed.

“Our base case remains that the cash rate has peaked at 4.35 per cent but that cuts won’t begin until late this year,” Ms Birch said. “That said, risks might be starting to skew toward an earlier commencement of rate cuts. We doubt the RBA will signal this at its coming meeting, however.”

Ms Bullock has pointed to high cost pressures in areas such as hairdressing and dining out as evidence that demand in the economy remains too strong, but the latest figures showed services inflation also dropped sharply to 4.6 per cent, from 5.8 per cent in the prior quarter.

Retail sales figures released on Tuesday showed a sharp drop in December and confirmed that the most aggressive rate hike cycle since the late 1980s alongside cost-of-living pressures had flattened spending.