With Australia's Core Inflation At 2.4%, Is An RBA Rate Cut Inevitable Now?

Australia's core inflation has slowed to 2.4% in the last quarter of 2024, which is more than expected, leading financial markets to predict a greater than 90% chance of a rate cut when the Reserve Bank makes its next decision on Feb. 18.

According to the Australian Bureau of Statistics (ABS) report released on Wednesday, the annual trimmed mean measure of consumer prices, which excludes volatile items, rose by 3.2% in the three months to December, just below the forecasted 3.3%. On a quarterly basis, core prices increased by 0.5%, also below the expected 0.6%, Bloomberg reported.

"The trimmed mean excluded price falls in both electricity and automotive fuel this quarter, alongside other large price rises and falls," said Michelle Marquardt, ABS head of price statistics. "Trimmed mean annual inflation of 3.2% was higher than CPI inflation of 2.4 per cent."

As a result, the Australian dollar fell, and the yield on three-year government bonds dropped by up to 8 basis points. Stocks continued to rise as money markets raised the chance of a rate cut in February to over 90%.

Three of Australia's big four banks now expect a rate cut in February after the inflation data came in lower than expected, News.com reported.

Both the Commonwealth Bank and ANZ had already predicted that the Reserve Bank of Australia (RBA) would act at its Feb. 17-18 meeting. While NAB initially expected the first rate cut in May, it has now reassessed its cash rate forecast.

Westpac's chief economist, Luci Ellis, says a rate cut is likely and has moved up her prediction for the RBA to lower the official cash rate from 4.35% in February.

Ellis, who was previously an assistant governor at the RBA, said the good news on inflation outweighs the strong labor market. The RBA wants to see a small rise in unemployment to help control inflation.

"With trimmed mean inflation at 0.5% in the quarter (3.2% year), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the board will have the required confidence to start the rate-cutting phase in February," she said.

AMP's deputy chief economist, Diana Mousina, also sees a February rate cut as more likely. She pointed to falling inflation in areas like rents, medical costs, and dining out, adding that the period of high goods inflation seems to be over. She hopes to see further slowdown in services inflation.

The Australian government has also welcomed the news of inflation dropping to a three-year low.

Federal Treasurer Jim Chalmers noted that inflation is easing faster than expected and affirmed that Australia is on track for a "soft landing." "It's not mission accomplished, but it means we've made much more progress," he said.