Australia’s inflation rate has eased again, in data that will buoy Labor heading into an election and raise hopes for mortgage holders another interest rate cut is not far off.
The headline inflation rate was 2.4% in the 12 months to February, a slight decrease on the previous month’s figure, according to consumer price index figures released on Wednesday.
Crucially, the Reserve Bank of Australia’s preferred measure for inflation, the “trimmed mean” or underlying inflation that strips out volatile items and various government subsidies, fell to 2.7% from 2.8%.
While most economists do not expect the RBA to reduce rates at its meeting next week, the reduction means a surprise cut is not completely off the table for 1 April, the last decision before the election.
The prevailing view, however, is that a cash rate cut in May, which would fall just after an election, is more likely.
The chief economist at Betashares, David Bassanese, said the fresh CPI figures may “open scope” for a cut in May.
“My base case is cuts in May and August,” Bassanese said.
The drop in the inflation rate is a positive development for the Labor government ahead of an election expected to be fought over competing cost-of-living policies.
The CPI data shows that the relentless increase in rental prices have eased, as have prices for new homes.
The Australian Bureau of Statistics data also shows that electricity prices are falling, aided by government rebates.
The treasurer, Jim Chalmers, said on Wednesday the data represented “more positive and promising news” in the fight against inflation.
“We know that these monthly numbers are volatile and can bounce around but the direction of travel on inflation is clear,” Chalmers said.
The government’s budget papers, released on Tuesday, suggest Australia is “increasingly likely” to come out of the inflationary period with a soft economic landing, rather than a thud.
Interest rate predictions
The RBA has consistently signalled that it “was not yet assured” inflation could be returned to the target range with a lower cash rate, dampening expectations of further cuts.
But the central bank has also acknowledged there’s a danger in keeping rates elevated for too long.
While central bankers are concerned cutting rates too early could trigger another bout of inflation, keeping rates elevated risks squeezing the economy, leading to unnecessary household pain and job losses.
The US’s tariff regime is also expected to weigh on the global economy, making it more likely that some central banks will need to cut rates to stimulate growth.
The RBA is looking for the trimmed mean to keep moving to the midpoint of its 2% to 3% band.
Most economists have pencilled in between one and three cuts for 2025, in addition to the RBA’s decision last month to decrease the cash rate by a quarter point to 4.1%.
Changes in the official cash rate flow through to borrowing and savings rates, including mortgages and deposit accounts.
AMP economist My Bui said on Wednesday the RBA will need to be “increasingly mindful” of the negative impacts of a global trade war on the Australian economy.
“We believe the next rate cut would be in May, following the release of the comprehensive tariff reviews from the US and the full quarterly inflation figures for Australia,” Bui said.
