RBA Interest Rate Cut Back In Focus Ahead Of Key Inflation Report

The chance of the Reserve Bank of Australia (RBA) cutting interest rates for the first time in over a year is back in focus, with an important inflation report due on Wednesday that will likely impact the week's economic outlook.

The RBA's board will meet on Feb. 3 and 4.

Economists at ANZ Bank expect the upcoming quarterly consumer price index (CPI) update by the Australian Bureau of Statistics for December will show inflation lower than expected, which could offer relief to mortgage holders, AFR reported.

If inflation eases, the annual rate for the RBA's preferred inflation measure could drop by 0.3 percentage points to 3.2%, decreasing below the RBA's target of 3.4%. The RBA has been closely monitoring "core" inflation, aiming to bring it back into the 2-3% range.

Mixed economic signals

Throughout 2024, the RBA kept the cash rate steady at 4.35%, expressing confidence that inflation was moving toward its target.

AMP chief economist Shane Oliver highlighted several positive signs, such as lower new dwelling costs, slowing rent growth, and weaker clothing prices. These trends, coupled with government cost-of-living measures like electricity rebates, suggest inflation could cool.

"So, if the trimmed mean inflation rate cools in line with our expectations it will be very hard for the RBA not to cut rates at its February meeting," Oliver said.

RBA may hold off

However, the RBA doesn't typically cut rates just because inflation drops; it also considers unemployment levels.

The RBA has historically focused on unemployment data to guide decisions, with inflation being a secondary concern, according to a report by ABC News.

Currently, Australia's unemployment rate is decreasing, with figures dropping from 4.1% last January, 4.2% in July, and to 4% in December. Given these trends, an interest rate cut may be unlikely.

In the past 50 years, the RBA has reduced rates twice when unemployment was falling -- during the Asian crisis and the US tech boom in the late '90s, and again between 2014-2019 when inflation was too low.

Neither of these conditions apply now. While the Aussie dollar has been falling, it's not dropping as drastically as in the late '90s and has recently steadied. Additionally, inflation remains too high, not low.

The RBA's position may become clearer the day after the CPI report, with Assistant Governor Brad Jones scheduled to speak at a super fund forum on Thursday. On the same day, the US Federal Reserve is expected to pause its interest rate cuts amid concerns that inflation could rise again due to economic policies under President Donald Trump.