Jim Chalmers launches economic election fight as inflation falls
As the odds overwhelmingly firm for an interest-rate cut in February, Jim Chalmers declares the government had handled the cost-of-living crisis better than other countries.
Jim Chalmers has launched the economic case for Labor’s re-election as the odds overwhelmingly firm for an interest-rate cut in February, declaring the government had handled the cost-of-living crisis better than other countries because it has driven down inflation while avoiding a recession.
The Treasurer declared the soft landing the government was aiming for was becoming “more and more likely”, after new figures showed underlying inflation in the year to December had fallen to 3.2 per cent with prices growth easing significantly in the second half of the year.
The quarterly inflation numbers released by the Australian Bureau of Statistics were below market expectations and the RBA’s forecast of 3.4 per cent, prompting financial traders to put the chances of a February 18 rate cut at nearly 96 per cent.
Headline inflation dropped to 2.4 per cent — well inside the 2-3 per cent target range — although the RBA is largely looking through this figure when deciding on interest rates as it has been artificially lowered by temporary cost-of-living measures.
Economists at Westpac, Bank of Queensland, UBS, Citi, Capital Economics and the Royal Bank of Canada were among those who shifted their rate cut expectations from May to February.
National Australia Bank is reviewing its May rate cut prediction while the Commonwealth Bank and ANZ reaffirmed their forecast the 4.35 per cent cash rate would be slashed to 4.1 per cent in February.
Goldman Sachs is forecasting back-to-back rate cuts in February and again on April 1, which would both likely be before the federal election due by May 17.
Financial markets show most traders are expecting follow up rate cuts after the election in late May and August.
But there remain leading economists who are tipping the RBA will keep rates on hold in February, partly due to the risk from a tight employment market being driven by high government spending.
With speculation the government was preparing to jettison the March budget and hold an election on April 12, Dr Chalmers would not guarantee a budget would be delivered before Australians went to the polling booths.
“We’re working towards a budget on March 25,” Dr Chalmers said.
“The reason I put it like that is because it’s a decision for the Prime Minister.”
Declaring there had been “substantial and sustained progress” in the fight against inflation, Dr Chalmers said the government had been able to drive inflation lower while protecting employment, which had not happened in other countries.
“Many countries around the world have paid for this kind of progress on inflation with much higher unemployment, or with negative quarters of economic growth,” he said.
“What Australians have been able to achieve is an economy where growth has continued to tick over, albeit slowly, where unemployment has stayed incredibly low, jobs are being created.”
He took aim at economists who argued record-levels of government spending was fuelling inflation, singling out Judo Bank chief economic adviser Warren Hogan who was predicting up to three rate hikes last year.
“We had a lot of free advice over the last couple of years from our political opponents and others who say that we should have cut much harder, or we should have done things differently,” he said.
“What these numbers show is we’ve been able to achieve something that other countries cannot, which is to make this remarkable progress on inflation at the same time as we maintain the gains we’ve made in the labour market and keep the economy ticking over.”
Opposition Treasury spokesman Angus Taylor said “the pain is far from over” and that the cost-of-living crisis had been more severe in Australia than other comparable countries.
“We have got a situation where Australians are paying 10 per cent extra in what they are buying everyday compared to when Labor came to power,” Mr Taylor said.
“Indeed, for working families, that number is closer to 18 per cent. That accumulated price increase, that accumulated pain for Australian households, is not going away.
“We have seen the biggest collapse in Australian standards of living in our history. Higher than any of our peer countries.”
Mr Hogan said the “economic case for a rate cut is very weak”.
“Given inflation is still above target, the cost of living is still a major issue for the great majority of Australians, and given employment growth is so strong and unemployment so low, what is a rate cut going to do to change that for the better,” Mr Hogan said.
“Monetary policy is for the medium to long term stability of our economy and it is not at all clear that a rate cut will improve that. In fact, it risks making it worse.”
Mr Hogan said it was too early to tell if Australia had actually navigated the post-Covid economic challenges better than other nations.
“If what you fear is a headline saying ‘we are in recession’ then sure they have done that well,” he said.
“But the cost of living impacts in this country are dragging on longer than in other countries and that of course is doing a lot of damage to the community.”
KPMG chief economist Brendan Rynne said he expected the RBA to keep rates on hold in February.
“We have to rely on core inflation – and that is still above target and showing that price pressures in the economy remain stubborn,” Dr Rynne said.
“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.”
ANZ chief economist Shane Oliver said underlying inflation — which strips out volatile items such as petrol and the impact of temporary rebates on electricity — had been within the RBA’s target for the past six months.
“And if you average the 0.5 per cent this quarter with the September quarter’s number you have got annualised inflation running around 2.5 per cent,” Dr Oliver told The Australian.
Dr Oliver said the inflation results “comfortably” justified interest rate cuts next month.
“They did say in their minutes in December that if economic indicators continued to come in line with their forecasts, or a little bit less, then in due course they will be in a position to cut interest rates,” he said.
“And of course what we have seen here is the numbers have come in below their forecast. So I think this clears the way for a rate cut.”
Moderating inflation in the December quarter was driven by price declines in housing, household goods, transport and health.
But there was strong price growth of 1.5 per cent in recreation activities and 0.8 per cent in insurance and financial services, while higher taxes pushed alcohol and tobacco up 2.4 per cent.
Electricity prices were down 25 per cent in 2024 largely due to the impact of state and federal government rebates.
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