'Door open' for rate cuts as inflation continues to tumble

December Consumer Price Index (CPI) quarterly data published by the Australian Bureau of Statistics (ABS) showed headline inflation has remained within the RBA’s 2-3% target range for a second consecutive quarter.

Trimmed mean inflation, the bank’s preferred measure of the economic state-of-play, came in just above target at 3.2%.

CPI rose 0.2% between October and December 2024, the same rise recorded in the previous quarter and well within the bank’s target at 2.4% in the 12 months to December.

Australian Bureau of Statistics head of price statistics Michelle Marquardt confirmed today's rises were the lowest recorded in four-and-a-half years.

ABS head of price statistics Michelle Marquardt said the trimmed mean excluded price falls in electricity and automotive fuel this quarter. Picture: ABS

“The June 2020 quarter was when the CPI fell during the COVID-19 outbreak when childcare was free,” she added.

The trajectory of both headline and core inflation over the past six months now firmly aligns with RBA governor Michele Bullock’s aim to see a “sustained period” of moderate levels.

Heading into today’s release, market pricing indicated a close to 80% probability of a 25-basis point cut in February.

February rate decision could go either way

REA Group senior economist Eleanor Creagh said today’s CPI figures have “opened the door” for a rate cut next month.

The next rate meeting on 18 February will be the penultimate ahead of the federal election deadline. Mortgage holders are feeling the sting of 14 months at a 13-year high of 4.35% and if rates stay where they are for now, the Albanese government will be under even more pressure to incentivise homeowners into his corner before May.

'The Reserve Bank of Australia and the cash rate': youtube.com/mortgagechoice

“Inflation is continuing to move lower, with the trimmed mean inflation measure undershooting the RBA's expectations and confirming a continued disinflation pulse into the end of 2024, keeping underlying inflation on track to return sustainably to the RBA's 2-3% target,” Ms Creagh said.

“The RBA is focused on underlying inflation returning to the 2-3% target band. The RBA's preferred measure of underlying inflation, the trimmed mean CPI, rose by 0.5% in Q4 2024. The quarterly rise of 0.5%, the lowest quarterly result since Q2 2021, represents an annualised pace of 2.1%, putting trimmed mean inflation back within the 2-3% band at the end of 2025.”

Speaking on the ABC, EY chief economist Cherelle Murphy agreed today’s inflation figures are “the best indicator we have had so far that the RBA can finally get on with that rate cutting cycle”.

Figures show the main contributors to the small 0.2% rise in the December quarter were driven by recreation and culture (+1.5%) and alcohol and tobacco (+2.4%). These rises were largely offset by falls in housing (-0.%) and transport (-0.7%).

All quiet on the banking front?

Banks have been quiet over the last few weeks and none of the big four have pre-empted RBA action with changes to fixed rates.

REA Group senior economist Eleanor Creagh says the door for rate cuts has been opened. Picture: supplied

BCU Bank and Macquarie bank are the only lenders to have cut fixed rates, with limited changes also seen for variable home loan offers.

In the lead up to these most recent figures, ANZ and Commonwealth Bank had predicted a February rate cut, with the latter anticipating homeowners could benefit from a whopping four rate cuts in 2025.

National Australia Bank is projecting five rate cuts, though does not forecast movement from the RBA until May. Westpac is aligned on this and has ruled in the likelihood of four cuts.

House prices driving hope

Housing costs are one of the main drivers of inflation and a key piece of the inflation jigsaw now driving optimism for a rate cut.

National home prices fell for the first time in two years in December, according to PropTrack, with capital cities having led the decline.

While houses prices remain 4.73% higher compared with 12 months ago, the national median home price has dropped $5000 to $795,000.

“Uncertainty around the timing of rate cuts likely remains a concern for some buyers, but others may look to pre-empt the move lower and transact now with the expectation of price rises following rate cuts motivating sooner purchase activity,” Ms Creagh said.

“Historically, before interest rates begin to move lower has been viewed as a good time to buy, we typically see home prices lift with buyer confidence and borrowing capacities boosted as rates fall.”

Though prices are likely to move higher as interest rates move lower this year boosting borrowing c apacity,Ms Creagh said the price uplift could be more muted compared to prior easing cycles given the stretched starting point for affordability.

“With interest rate cuts on the horizon, the price falls seen in the past month are likely to be short lived.”