The Reserve Bank of Australia (RBA) is likely to keep the cash rate on hold at its next meeting, following the release of the latest inflation data.
However, it’s almost certain that the next move in rates will be down, not up, as the numbers seem to provide yet more proof that the RBA’s campaign against high inflation - which has seen it raise the cash rate no less than 13 times since May 2022 - is working.
The January Consumer Price Index (CPI) is the only official inflation release before the central bank’s next monetary policy meeting on the 18th and 19th of March.
Together with economic growth numbers for the fourth quarter of 2023, which will be released on the 6th of March, it will be one of two key pieces of official economic data on the table, when the board makes its rate decision.
The numbers…
The Australian Bureau of Statistics (ABS) monthly CPI indicator rose 3.4% in the year to January, coming in just below market expectations of 3.5-3.6%.
The January data follows a 3.4% rise in the 12 months to December 2023.
Housing played a key role in these numbers.
New dwelling prices rose 4.8%, down from 5.1% in December, while rental prices increased 7.4% in the year to January, steady from the December figure.
As the ABS says, “the rise in rental prices continues to reflect strong demand for rental properties and tight rental markets.”
Excluding so-called “volatile” items and holiday travel, inflation eased from 4.2% to 4.1% in year-on-year terms.
Perhaps more important from the Reserve Bank’s perspective is the annual trimmed mean measure - the central bank’s preferred dataset when measuring inflation.
That showed inflation was 3.8% in January, down from 4.0% in December.
It’s still well above the RBA’s target range for inflation of 2-3%, which the central bank has made clear must be achieved by the end of 2025.
The interest rate outlook
National Australia Bank (NAB) economist Taylor Nugent says the monthly inflation numbers should be taken with a grain of salt, as not all goods and services are measured every month, with the full picture only emerging every quarter.
“I don't think it's material, and I don't think the RBA certainly will be reading too much into this,” he says.
“We didn't see what they're really focused on, which is that services side (inflation) and that domestic pressure.”
The Reserve Bank governor Michele Bullock raised eyebrows late last year when she warned that large price rises by hairdressers, dentists, and restaurants were pushing up services inflation and making the RBA’s job harder.
The next full quarterly CPI figure isn’t due until the 24th of April, and Mr Nugent believes the Reserve Bank “will want to wait and see that”.
But he is clear about one thing.
“Another hike from the RBA is not in our central forecast at the moment.”
However, he says “it will be some time before they feel comfortable moving the cash rate down, and so we don't expect them to be in a position to cut rates until November this year.”
That forecast is in line with money market expectations, with a 0.25% cut priced in for November.
The optimistic view
With interest rates at their highest mark in more than a decade, many households struggling with high variable mortgage rates would regard a November rate cut as not coming soon enough and at 0.25% - not big enough.
But Australia’s biggest housing lender, the Commonwealth Bank, has a more optimistic view than NAB and the money markets.
It’s sticking to its prediction that there will be at least three RBA interest rate cuts totalling 0.75% by the end of the year.
Pointing to the CPI numbers, it says inflation rose by 0.4% in the month of January after falling 0.1% in December.
If you take inflation numbers from the last four months and annualise them, the CBA says Australia’s current annual inflation rate is only 2.1%, which, of course, is at the bottom end of the RBA’s inflation target band.
The message from the CBA to the central bank is clear:
“Congratulations! Job done! Bring on the interest rate cuts.”