The inflation data released last week has practically rolled out the red carpet for the first interest rate cut we’ve seen since November 2020. It’s happening, folks – no crystal ball required.
Reserve Bank Governor Michelle Bullock has been clear that rates won’t budge until inflation is comfortably snuggled between the 2-3% range of the RBA targets.
Guess what? We’ve hit that sweet spot. The inflation rate is currently sitting at 2.4% per annum, down from 2.8% at the end of the September quarter.
But here’s the catch: the key word is ‘sustainably’.
Much of the recent dip in inflation can be attributed to the government’s cost-of-living relief measures. From electricity rebates to childcare subsidies, these handouts have helped to keep inflation under control. However, like a good party, all good things must come to an end and these measures are unfortunately, temporary.
That’s where the “trimmed mean” inflation measure comes in. Unlike the headline number, the trimmed mean removes one-off factors like government rebates and seasonal swings. The result? It came in at 3.2% per annum, down from 3.6% in the September quarter. Still a little higher than the RBA’s sweet spot, but an encouraging improvement, nonetheless.
This is particularly positive when you consider that most Australians got a “pay rise” in July thanks to the government’s tax cuts. OK, it’s not a raise in your job pay per say, but we’ll take it!
The markets are now betting with 92% certainty that we’ll see a rate cut this month and all four major banks agree. The markets are pricing a 0.86% cut during 2025.
I think the first cut will happen in April or May. But, just between us, I’d be shocked if rates aren’t at least 1% lower by this time next year.
But hey, who am I to predict the future? I’m just another guy with an opinion and there are so many.
What really matters here is that when rates drop, borrowing power rises. And when borrowing power goes up, well, prices tend to follow. It’s like a financial game of “one thing leads to another.”
So, while it’s fun to keep an eye on interest rates – who doesn’t love a good economic cliffhanger right? – The bigger story is that there’s a window of opportunity right now. It may not last long!
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