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Major interest rates call as key Australian inflation data released

An interest rate cut could come sooner than expected if unemployment keeps rising and and inflation continues tracking lower.

The good news on inflation keeps coming and that should translate to interest rates staying on hold next month and a possible cut earlier than expected.

The November data confirmed a further step down in the rate of price increases, with annual inflation dropping to 4.3 per cent - from 4.9 per cent in October and what was a cost-of-living-crunching 8.4 per cent peak in December 2022.

When the December inflation data is released on January 31, it is likely to confirm a further step down to around 3.5 per cent - when the high December 2022 monthly rise is replaced with a smaller increase in prices. Petrol prices fell 5 per cent in December and this alone will slice almost 0.2 percentage points from the inflation rate.

A stylised graphic of Michele Bullock in front of a graph showing the cash rate.
The Reserve Bank may be under pressure to offer some 'welcome relief' to mortgage holders after inflation figures for the December quarter should show a further drop on the back of falling petrol prices. (Source: Yahoo Finance)

 

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The annualised inflation rate in the first 11 months of 2023 was 3.0 per cent. Recall the RBA target for inflation is 2-3 per cent.

It is now very likely that inflation will keep easing to the midpoint of the target range during 2024 and, as a result, the war against inflation has largely been won. This means the economic policy task is moving rapidly towards adjusting policy - interest rates in particular - to support growth and employment rather than fighting yesterday’s battle against inflation.

Also by the Kouk:

Current interest rate settings are restrictive and, if left too high for too long by the Reserve Bank (RBA), there will be a crunch to economic growth, which will unnecessarily force the unemployment rate even higher. It would be wise to work to avoid this, which is why money markets and sensible economists are expecting interest rate cuts starting in approximately six months.

The cuts could be sooner if the next few months of labour force data confirm a sharp lift in unemployment and inflation continues to track lower.

Real wages starting to rise

The fall in inflation, in concert with the pick-up in wages growth seen in 2023, is delivering welcome relief in cost-of-living pressures.

With inflation breaking lower at an annualised pace around 3-3.5 per cent - and set to fall below 3 per cent through 2024 - and the recent wage price index rising at an annual pace of 4 per cent, the crossover of wages growth above inflation is unfolding.

This is no doubt one factor behind the recent uptick in consumer confidence and, as these trends are locked in over 2024, decent increases in real wages will be evident. If interest rates are in fact cut during 2024, this will further work to support consumer confidence and spending.

For the RBA, the news of sharply lower inflation will be welcome and it is clearly tracking below the RBA forecasts made in November. This is likely to be confirmed when the December-quarter inflation data are released later this month, which will lock in a ‘rates on hold’ decision for February and interest rate cuts later this year.

The RBA will update its forecasts with its Statement on Monetary Policy next month. Expect it to scale back the inflation outlook and, with that, signal a bias to cut interest rates.

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Yahoo Australia