'CPI trumps everything': Westpac, UBS, Bendigo switch to February rate cut expectation
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More news: Westpac, UBS and Bendigo and Adelaide Bank all pulled forward their expectations for the Reserve Bank's next interest rate cut from May to February, after a better-than-expected inflation result for the December quarter.
In a reversal of its November forecast, Westpac said it has "just enough evidence" to conclude that disinflation has proceeded faster than the RBA expected, and the board should now have the required confidence to start the rate-cutting phase in February.
UBS expects the RBA to make a 25-basis-point cut in February, and two more by May. Chief economist for Australia, George Tharenou, noted that "CPI trumps everything".
Bendigo and Adelaide Bank also said that the slightly lower-than-expected Q4 inflation data "opens the door" for a February rate cut, and validates the bank's forecast of three cuts in 2025. The bank previously expected the first cut to be in May, saying that more constructive data was required to support a February cut.
What they said: "...an RBA cut on February 18 is now the most likely outcome, although we continue to suggest that this will be a shallow easing cycle, given a 'neutral' cash rate is 3.5%," said Bendigo Bank's chief economist David Robertson.
"If the RBA do cut in February, the second cut would most likely be in May (if Q1 CPI to be released on April 30 remains benign) with other factors including jobs data and offshore developments remaining important."
Reporter's view: Rate cut hopes rise on back of better-than-expected inflation data
Reporter's view: With a better-than-expected inflation result now in the bag for the December 2024 quarter, economists and the markets are looking at what the Reserve Bank might choose to do at its first meeting in the year.
Immediately after the inflation result was published, the markets jumped and the dollar fell as the chances of a rate cut increased. The ASX 200 rose 0.8% by 12:11pm AEDT while the dollar was buying 62.33 US cents.
Betashares chief economist David Bassanese now thinks there’s ’no question’ the economy ‘deserves’ a rate cut. And he expects to see the start of the easing cycle kick off after the RBA's 17 to 18 February meeting. He has pencilled in another two rate cuts later on in the year, with the RBA likely to wait for confirmation that inflation continues to decline as hoped.
But while RSM Australia economist Devika Shivadekar says the data shows a gradual stabilisation of prices and a rate cut is “on the table” for February, she's not certain it will happen as early as others are suggesting.
Instead, she thinks the likelihood of an old-hold result is slightly higher.
"The RBA would probably yet again err on the side of caution and insist on ensuring a ‘sustainable’ decline in trimmed mean inflation," she said.
In other words, the RBA board may still want more data to be sure. The RBA has shown in the past a willingness to be patient and hold steady to make sure the data isn't a blip, will it do the same on the back of this result?
Inflation comes in below forecasts for December 2024
The news: The consumer price index increased 0.2% in the three months to December 2024, bringing the annual result to 2.4% on a headline basis. This was in line with the prior quarter and compares to a 2.8% annual result in the September period.
The critical trimmed mean measure was up 3.2% on an annual basis, compared to 3.6% in the September quarter. This was below the 3.3% expected by market economists for the trimmed mean, and 2.5% for headline.
The numbers: The biggest contributors to the quarterly rise were recreation and culture, up 1.5%, and alcohol and tobacco up 2.4%. Housing and transport declined 0.7%.
There was a fall in energy prices over the quarter for the headline rate, with electricity down 9.9%, on the back of government cost of living relief measures. Automotive fuel fell 2%.
On an annual basis, electricity, automotive fuel and new dwelling prices all pulled back significantly.
Annual goods inflation was 0.8%, down from 1.4%. The crucial services inflation measure was 4.3%, down from 4.6% in the prior quarter.
Non-discretionary inflation was lower than discretionary for the first time in four years.
The context: The Reserve Bank will meet next month to decide on interest rates for the first time in 2025. The inflation figures for the final quarter of 2024 are considered the "make or break" for a potential rate cut at this meeting.
What they said: "December quarter’s rise was the same as the 0.2 per cent increase in the September 2024 quarter. These rises were the lowest recorded since the June 2020 quarter when the CPI fell during the Covid-19 outbreak when childcare was free," said ABS head of prices statistics Michelle Marquardt.
The sources: Australian Bureau of Statistics media release, Westpac research, Bendigo Bank research, UBS research
