Good inflation numbers strengthen case for the February RBA rate cut

Scott Kuru January 29, 2025 4 min read

KEY POINTS

The latest quarterly inflation data strengthens the case for the Reserve Bank of Australia to cut the cash rate from its 13-year high of 4.35% as soon as next month
Over the twelve months to the end of the December quarter last year, national inflation was 2.4%, down from 2.8% in the previous quarter
Underlying inflation recorded lower than the RBA’s expectations, at 3.2% on the bank’s preferred “trimmed mean” measure

Financial markets have put the chances of a rate cut by the Reserve Bank of Australia in February - its first board meeting for 2025 - at around 80% after the release of lower-than-expected quarterly inflation data from the Bureau of Statistics.

The inflation numbers have raised hopes of interest rate relief for Australians struggling with high mortgage repayments.

The details

The Australian Bureau of Statistics says its Consumer Price Index, or inflation measure, rose just 0.2% in the last three months of 2024, meaning on an annualised basis, inflation was 2.4% - down from 2.8% the previous quarter.

It’s the lowest quarterly headline inflation figure since March 2021.

Underlying inflation was also lower on the Reserve Bank’s preferred “Trimmed mean” measure which, as the ABS explains, “provides a view of underlying inflation by reducing the effect of irregular or temporary price changes that can impact the CPI.

“This quarter, the Trimmed mean excluded the falls in both electricity and automotive fuel, alongside other large price rises and falls,” the official statistician said.

The ABS says Trimmed mean annual inflation was 3.2%, down from 3.6% in the September quarter.

That’s lower than the RBA’s own forecasts, raising hopes the central bank will finally be in a position to lower the cash rate and reduce some of the mortgage pain Australian homeowners have been experiencing.

The RBA is mandated to use interest rates to keep inflation in a 2-3% target band and has kept the cash rate at a 13-year high of 4.35% for more than a year in a bid to bring inflation down.

Cherelle Murphy, EY Oceania’s Chief Economist, said the inflation data was “really good news”.

However, she added a note of caution.

“I would just warn, of course, this is not the only indicator that matters to the Reserve Bank,” she said.

“Other factors will come into it, including that relatively tight labor market and the risk of inflation from international factors, including, of course, a lot of the geopolitical tension we're seeing and the possibility of blanket tariffs from the Trump administration.

“But you'd have to say that all up, this is looking really good and certainly the best indicator we've had so far that the RBA can finally get on with that rate-cutting cycle,” Ms Murphy told ABC News.

Micaela Fuchila - the Chief Economist at investment bank Jarden - agreed.

“I think they (the RBA board) are in a really good position where they can be more confident that inflation is coming down at the underlying level.

“And in addition to that, the labor market remains in good shape.

“But if there are expectations that wages growth can pick up again, then that will be a barrier for them to deliver on this cut,” Ms Fuchila warned.

Jarden is one of the more cautious financial institutions when it comes to predicting rate cuts, believing the Reserve Bank will only deliver two cuts of 0.25% this year.

Australia’s largest mortgage lender, CBA, is forecasting 4 RBA cuts - taking the cash rate down to 3.35% - meaning variable rate retail mortgage rates could end the year in 5 to 6% territory.

EY is somewhere in the middle.

“I don't think it's going to be a particularly aggressive rate cutting cycle, of course, unless conditions change, particularly internationally,” EY’s Cherelle Murphy said.

“But at the moment, it's looking like we might get maybe two, three rate cuts as the year progresses.”

The better-than-expected inflation data was welcomed by the Federal Treasurer Jim Chalmers.

“These numbers are better than the market expected and they are lower than the forecast for inflation, and both of those developments are very welcome,” he said.

Housing and inflation

The ABS CPI figures also show that after a period of extremely high growth, rents are moderating.

Between the December quarters of 2023 and 2024, annualised rental growth has fallen from 7.3% to 6.4%.

Although that is still high in historical terms, CoreLogic Research Director, Tim Lawless, said it showed housing costs were “doing the heavy lifting” in the battle against inflation.

“Housing prices (including things like rents, building costs and utilities) have the largest weighting in the CPI calculation, so movements in housing CPI have a material impact on the overall CPI numbers,” he said.

“The past two quarters has seen housing inflation fall, driven by a combination of lower utility prices (mostly thanks to energy rebates) but also the first quarter since mid-2021 where the cost of building a new owner-occupied home has fallen, along with much less upwards pressure on rents.”

This, he declared, has paved the way for “a good-looking set of (inflation) numbers helping to set the scene for lower interest rates.”

The Reserve Bank of Australia board meets on the 17 and 18 of February to consider the direction of interest rates.