RBA’s next move on interest rates revealed

New inflation data released today has given the surest sign yet of whether the RBA will lift interest rates again when it meets next Tuesday.

Inflation data released today has given the surest sign yet of whether the Reserve Bank of Australia (RBA) will lift interest rates again when it meets next Tuesday.

The inflation figure for the three months to December 31 came in at 4.1 per cent, compared to the RBA’s forecast of 4.5 per cent and market expectations of 4.3 per cent.

This compares to inflation of 5.4 per cent in the September quarter.

For the month of December alone, inflation was 0.6per cent, below market expectations of 0.9 per cent.

While inflation still remains above the RBA’s target zone of two to three per cent, the weak December quarter figures means the chances it will raise interest rates from their current 4.35 per cent at the RBA board meeting next Tuesday (February 6) are all but non-existent.

Retail sales figures released yesterday also support the case for interest rates to remain on hold.

In December, retail spending fell 2.7 per cent compared to November, a sign that households tightened their belts further.

It’s thought that consumers brought forward much of their Christmas shopping from December to November in order to capitalise on the discounts on offer in the Black Friday sales.

RBA Governor Michele Bullock may not start cutting interest rates until 2025, some economists fear. Picture: John Feder/The Australian

But interest rate cuts from the RBA remain on the distant horizon, with most market watchers suggesting they won’t cut interest rates until the second half of 2024.

Some economists suggest the first rate cut won’t come until November with others forecasting that mortgage stressed homeowners may need to hold on until 2025 before relief is delivered.

Among economists’ concerns are that the new tax cuts announced by Prime Minister Anthony Albanese last week could increase inflation.

This is because the new plan will put more money into the pockets of low and middle income earners, who tend to spend any additional money they receive.

Deloitte Access Economics partner Stephen Smith told news.com.au any expected interest rate cuts in 2024 “could become one, or perhaps none” due to the potential for the tax cuts to increase inflation.

The Prime Minister said the new tax cuts won't raise inflation, but some economists disagree. Picture: NCA NewsWire / Martin Ollman

Mr Smith said that the tax cuts will pump an additional $2.6 billion into the economy and that “in the current environment, the government shouldn’t be putting additional money into the economy when inflation is already a problem”.

He added that while the figure wasn’t “a huge amount” the RBA “will be watching it pretty closely”.

The Prime Minister has said the tax cuts will drive inflation up, but Brendan Rynne, KPMG chief economist, described that as “optimistic”.

“The changes are likely to be marginally more inflationary than the original stage three proposals,” he said.

Dr Rynne added that given inflation is “already coming down fairly quickly”, stoking demand may lead to cost of living pressures on Aussies to continue for longer.

Originally published as RBA’s next move on interest rates revealed