'No question the economy deserves an interest rate cut'
By Matthew Wai
The consumer price index (CPI) rose 0.2% in the December quarter and 2.4% annually, the Australian Bureau of Statistics (ABS) has revealed.
The most significant price rises in the quarter were recreation and culture (+1.5%), and alcohol and tobacco (+2.4%), while housing (-0.7%) and transport (-0.7%) were partially offsetting the rise.
It has also improved from the previous corresponding period, dropping 0.4% from the September quarter.
Further, the annual trimmed mean figure fell to 3.2%, which is notably lower than the Reserve Bank of Australia's (RBA) November expectation of 3.4%.
From this, Betashares chief economist David Bassanese says there is a good chance the trimmed mean figure could fall back to with the RBA's target band by June, rather than the RBA's current expectation of December.
"As a result - and despite still solid employment growth - there's no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings," he added.
"I anticipate the RBA will welcome these inflation results and reward hard-pressed households and mortgage holders with an interest rate cut at the February 17-18 policy meeting."
MLC Asset Management senior economist Bob Cunneen agreed with Bassanese, stating that the mild inflation outcome will pressure the RBA to lower the interest rate.
He explained there will be two counts to consider for the RBA, the first of which will depend on when governments wind back the electricity subsidies and rent assistance that are "mitigating" the cost-of-living crisis.
However, the RBA is forecasting inflation will spill over its target range once state and federal governments pull back support.
"Headline inflation is expected to temporarily be within the target range over the coming year, owing primarily to cost-of-living support measures provided to households," the RBA said in a statement in November last year.
"However, year-ended headline inflation is then expected to increase in the second half of 2025 to be above the target band when energy rebates are scheduled to end, before moving in line with underlying inflation once these temporary effects have passed."
Secondly, Cunneen says inflation pressures beyond the essentials (medical, insurance and rents) will continue to be troubling.
"The RBA is optimistically forecasting that the Australian economy will accelerate in 2025 from the lacklustre growth performance of 2024," Cunneen says.
"While income tax cuts last year and the solid jobs market are positives, the reality is that Australian consumers are reluctant to spend given the cost-of-living squeeze and high interest rates."
Additionally, State Street Global Advisors APAC economist Krishna Bhimavarapu asserted a rate cut should occur.
"Not only did the RBA's preferred inflation metric (trimmed mean CPI) come in line with our below-the-market forecast, it is now also the lowest in 12 quarters... The key question now is when will economic growth improve," Bhimavarapu says.
This article first appeared on Financial Standard
Get stories like this in our newsletters.