Australia’s big four banks have locked in predictions of an interest rate cut within weeks and the local share market has hit a fresh record high amid optimism that inflation is cooling.
NAB brought forward its guidance for when the Reserve Bank will lower the cash rate by three months, to February, hot on the heels of Westpac’s move on Wednesday.
It comes after core inflation — a measure of prices that strips out bumps — slowed to 3.2 per cent in the year to December.
That was down from 3.6 per cent in the previous quarter and was the lowest pace in three years.
Core inflation remains above the Reserve’s target, but analysts took the numbers as a clear sign the cost of living crisis was finally coming under control.
“The (December data) confirms that inflation has moderated more quickly than the RBA expected,” NAB chief economist Alan Olster said.
He said the central bank would likely revise its inflation estimates when it releases new forecasts after the board meeting due on February 17 and 18.
“This now makes February the most likely starting point for a gradual easing in interest rates,” Mr Olster said.
“While the labour market remains strong, we do not see current conditions as inflationary. However, the RBA’s growing confidence will need to come in part from a reassessment of tightness in the labour market.“
When the central bank does cut, borrowers should not expect rapid movement.
Banks are split as to how low the RBA will go — and Mr Olster expected “gradual easing”.
Markets were optimistic after Wednesday’s forecast-beating inflation reading.
Traders were overnight pricing in a 95 per cent chance of a rate cut in February and the ASX200 hit a new peak of 8515.7 points during Thursday trade, before retreating back below 8500.
Energy and retailers fared the best.
Rate relief would also spark activity in the property sector and potentially add pressure back into the home-buying market.
It’s also sparked activity in Canberra, with reports that Prime Minister Anthony Albanese will be prompted to call an election for April.
But the Reserve Bank received a warning signal from the US Federal Reserve overnight.
The Fed held its key interest rate at the 4.25 to 4.5 per cent target band and warned that “inflation remains somewhat elevated”. It means the US central bank has paused easing to make sure price rises do not restart.
“We do not need to be in a hurry to adjust our policy stance,” Fed chair Jerome Powell said.
There will be plenty of risks should the RBA lower rates at the upcoming meeting, with the jobs market smashing expectations and a chance that a cut reignites inflation activity.
Headline inflation is already set to rise through 2025 as temporary subsidies including power bill rebates unwind from the system.
Economists are in hot debate on whether Australia’s unemployment rate — close to multi-decade lows — is sustainable, or a source of potential cost pressure.
Mr Olster said there was value in the Reserve waiting longer before making a decision.
Yet he said the RBA had clearly changed its communications at the most recent meeting, in December, opening the door for a move.
Australia’s growth has been sluggish amid the prolonged fight to rein in inflation, which was sparked by enormous government and RBA stimulus coming out of the pandemic. That overheated the economy and temporarily boosted incomes and brought super low unemployment.
Per capita GDP — measuring each person’s slice of the pie — has been falling for seven-straight quarters as the RBA works to rein in demand.
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