Slowing Inflation in Australia Fuels Hopes of Early Interest Rate Cut

A billboard advertises a new home for sale in Melbourne, Australia, on Sept. 6, 2022. William West/AFP via Getty Images

The 2025 New Year might bring relief for Australian mortgage holders, with economists predicting an earlier-than-expected interest rate cut.

This follows the Australian Bureau of Statistics (ABS) latest data, released on Jan. 8, showing a decline in the annual “underlying” inflation rate, which excludes short-term volatile items, from 3.5 percent in October to 3.2 percent in November.

Independent economist Saul Eslake explained that if underlying inflation continues its descent in December to 3.1 percent or even 3.0 percent, the annual rate for the December quarter could fall below the Reserve Bank of Australia’s (RBA) forecast of 3.4 percent.

Eslake suggested that the Reserve Bank of Australia (RBA) might find the recent decline in underlying inflation, along with other factors, sufficient to justify an interest rate cut in its next review meeting scheduled for February.

“But I‘d say, taken together with other evidence of continued sluggish economic growth, and the fact that wages growth has slowed noticeably even though the unemployment rate has remained well below the RBA’s estimate of the level consistent with its estimate of ’sustainable full employment,’ that should be ‘close enough’ to allow them to initiate a first interest rate cut at their meeting on 17th–18th of next month,” he told The Epoch Times.

Krishna Bhimavarapu, an economist at State Street Global Advisors APAC, shared a similar view, noting that “disinflation is running apace.”

“The annual trimmed mean (3.2 percent) continued moving towards the Reserve Bank of Australia’s target band, and on a more encouraging side, inflation in the new dwellings category was the weakest since mid-2021,” he said.

Relief Not Yet in Sight

At its last review meeting on Dec. 10, the RBA maintained that headline inflation remained too high to announce a rate cut.

The central bank has prioritised underlying inflation measures, a figure less affected by volatility and temporary price fluctuations, such as those caused by power bill relief.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” RBA Governor Michele Bullock noted in a statement.

The RBA’s underlying inflation measures remain around 3.5 percent, still far from the 2.5 percent midpoint target.

The most recent forecasts from the November monetary policy statement predict that inflation will not return sustainably to the midpoint of the target range until 2026.

While the Board sees signs of declining inflationary pressures, risks remain. Recent data on economic activity have been mixed, with weaker-than-expected growth in output.

Persistent Inflation Sparks Caution Among Experts

Despite optimistic forecasts from some economists, others are urging caution.

EY senior economist Paula Gadsby highlighted persistent services inflation as a reason for the RBA to hold back on rate cuts.

“The central bank will need further evidence of price moderation from December quarter data, due in late January,” she said, adding that the RBA might keep the cash rate steady at 4.35 percent through the first quarter of 2025.

Meanwhile, November’s headline inflation rate had inched up to 2.3 percent, slightly exceeding expectations.

ABS head of prices statistics Michelle Marquardt attributed this to the timing of government energy subsidies, with households receiving fewer rebate payments in November than in October.

As the RBA continues to focus on underlying inflation, the trimmed mean’s movement closer to the target range may provide some hope for borrowers.

AAP has contributed to this article.