According to the Australian Bureau of Statistics, the country’s annual trimmed mean gauge of consumer prices, which excludes volatile items, surged 3.2% in 4Q24, below the expected 3.3%. Core consumer prices increased by 0.5% on a quarterly basis, which also exhibited a lower figure than a forecast of 0.6%.
With Australia’s core inflation decreasing lower than anticipated in the final quarter of 2024, there is a possibility of an interest rate cut as early as next month and exerting downward pressure on the currency.
In reaction to the easing inflation data, the currency weakened, and the yield on three-year government bonds, which are sensitive to policy changes, decreased by up to 8 basis points. Meanwhile, stocks continued to climb as money markets raised the probability of a rate cut in February to over 90%.
The Reserve Bank of Australia (RBA) aims to keep CPI within the 2-3% target range as it has remained outside the target band since the end of 2021. The bank is focusing on core inflation due to government subsidies suppressing headline prices.
Economists from Westpac Banking Corp., Royal Bank of Canada, TD Securities, and AMP Ltd. have advanced their forecasts, now expecting the Reserve Bank to implement its first interest rate cut in February. Goldman Sachs Group Inc., initially predicting reductions in February and May, has adjusted its outlook to include further easing in April.
Diana Mousina, AMP’s deputy chief economist, expressed confidence that the latest data solidifies the case for a rate cut in February, highlighting declines in inflation in challenging sectors like rents, medical expenses, and dining.
She noted that the phase of rising goods prices seems to have ended, with a further deceleration in services inflation being the next desirable outcome.
The latest data now reinforces the RBA’s confidence in stabilizing inflation within a reasonable timeframe.
In their December meeting, policymakers shifted towards a more dovish approach, considering scenarios where rates could be reduced or maintained at their current restrictive level. They found both possibilities feasible and decided to keep rates steady at 4.35%.
