Inflation drop puts rate cuts on the table. It’s just a matter of when.
We’ve all been suffering from economic whiplash about when rates are going to ease. But this time, forecasters are feeling more certain that a cut is coming in a matter of weeks.
Economic forecasting at the end of 2024 was a blink-and-you’ll-miss-it affair.
In September, NAB shifted its predictions for the first Reserve Bank rate cut from February to May 2025. Then, in October, the Commonwealth Bank economics team pushed back its December 2024 cut forecast to February (where it has, to its credit, remained ever since). By November, NAB had moved its forecast again, back to May from February, and Westpac had done the same. Over December, ANZ was holding firm on a May cut, but just over a week ago reverted to February.
After the release of quarterly inflation data today, Westpac was one of the first out the gate, moving its prediction back to a February cut. UBS and Bendigo Bank have also now shifted to next month.
These flip-flopping forecasts are undoubtedly bewildering for members of the public with large mortgages, who are hoping for a bit of relief from their high repayments. But it is illustrative of a critical point about the current economy and the RBA’s track record. Specifically, the data has been volatile and giving mixed signals for months, and the central bank has been willing to sit on its hands until the situation has become less murky.
The latest inflation data appears to have cleared up a lot of that murkiness. The December quarter inflation data came in lower than most economists expected on Wednesday morning, at 3.2% on an annual trimmed mean basis — compared to 3.4% expected by the RBA in its latest forecasts and 3.3% economic consensus. The chances of a rate cut in February have risen once again, and there's scant other data due before the RBA meets to justify further forecast changes in the meantime.
