While an interest rate cut for Australian mortgage holders is not yet in the bag, the signs are definitely promising.
The latest update from the Australian Bureau of Statistics confirms that the slowdown in underlying inflation that occurred in the September quarter continued through the three months to December, dragging the annual trimmed mean measure (that excludes more volatile price movements) from 4 to 3.2 per cent in six months.
After the decline in underlying inflation appeared to slow then stall in the middle of last year, the Reserve Bank of Australia signalled that any rate cuts were some time off.
But evidence of a sustained slowdown in the second half of 2024 has interest rate relief for borrowers squarely back in the frame.
Though underlying inflation remains above the RBA’s 2 to 3 per cent target band, headline inflation (2.4 per cent) is almost bang in the middle and the downward trajectory of underlying inflation’s growth rate could provide the central bank board with the reassurance it needs to consider a rate cut at its first meeting for the year on February 17-18.
Markets appear convinced this is what will happen.
But there are some wrinkles that might cause the RBA to hold off on reducing its cash rate just yet.
One of them is the extent of uncertainty about how global inflation pressures might evolve.
US President Trump is throwing tariff threats around like confetti and has talked a big game about hitting imports from major trading partners like China, Mexico, Canada and the EU with major imposts. If implemented, such tariffs could reignite inflation in the US, with probable spillover effects internationally.
Not only that, but the disruption this would cause to global trade flows could add to costs, which may in turn be passed through to consumers.
Locally, the looming federal election could also provide some pause for thought for the central bank.
While inflation has continued to slow despite strong government spending, particularly at the state level, if the rival political parties engage in a major bidding war ahead of the election that might cause the RBA to recalculate its inflation expectations.
The Albanese government will be quietly hoping that next month the RBA Board will put these quibbles to one side and announce the country’s first official interest rate cut in more than four years.
For a government struggling in the polls, that would be a welcome start.
Outlier 