Inflation figures due out on Wednesday could “make or break” the case for a pre-election rate cut next month, according to economists, in one of the most politically consequential set of numbers of recent times.
The market is pricing in an 84% chance of a 25 basis-point rate cut when the Reserve Bank of Australia (RBA) meets mid-next month, although those odds will rise or fall based on the December quarterly consumer price index.
While the RBA has forecast for the trimmed mean (an underlying inflation rate that strips out volatile price swings) to come in at 3.4%, recent monthly data suggests the quarterly figures could come in lower.
The chief economist at Betashares, David Bassanese, said a 3.2% result would “cement” the case for a rate cut, 3.3% would make it a “line-ball” decision and 3.4% would probably mean no rate cut in February.
“It will make or break the decision,” said Bassanese, who has forecast a rate cut-cementing 3.2% reading on Wednesday. “A rate cut would help lift the squeeze on households and mortgage holders would obviously directly benefit.
“A cut could also psychologically lift some of the caution around households and just be seen as a vote of confidence in the economy.”
The official cash rate has sat at an elevated 4.35% since November 2023, while the last rate cut occurred in November 2020 as part of a policy to stimulate a pandemic-stricken economy.
The treasurer, Jim Chalmers, said on Tuesday he was confident 2025 would be better economically for Australians after grappling with rising cost-of-living pressures last year.
“We are making progress on inflation. We have got those real wages growing, we have kept the jobs market in really quite extraordinary conditions, so all of those things will flow through into some of the other indicators,” he told ABC radio on Tuesday.
“We expect growth in our economy to pick up a little bit, not a lot, but a little bit, and that will be a good thing.”
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Polling is tight before Australia’s election, due by May, with unofficial campaigning under way. While most incumbent governments that faced voters last year lost power, those that won unveiled aggressive policies designed to alleviate cost-of-living pressures.
The market expects the RBA to start cutting the cash rate before the trimmed mean drops into its target 2% to 3% band, provided the central bank is confident of a decelerating trend.
The ASX tracks market expectations of a change in interest rates through the pricing of cash rate contracts. The rate tracker lists a 16% chance of “no change” in February, a view supported by robust employment data that recently created uncertainty over whether the labour market required stimulus.
The headline inflation rate, which includes government rebated-electricity bills, last registered at an annual 2.8% rate at the September quarter release.
With AAP
