Australia’s latest inflation data has surpassed expectations, prompting the Commonwealth Bank (CBA) to revise its outlook on potential interest rate cuts by the Reserve Bank of Australia (RBA). Previously anticipated as a surety, a rate reduction planned for May is now uncertain, although many economists still expect a cut.
Headline inflation climbed by 0.9 per cent in the first quarter of this year, holding the annual rate steady at 2.4 per cent. Underlying inflation saw a rise of 0.7 per cent, bringing the annual figure down to 2.9 per cent, making it the first instance since 2021 that it falls within the RBA’s target band of 2 to 3 per cent.
Gareth Aird, CBA’s head of Australian economics, remarked that trimmed inflation rates were slightly higher than the bank’s predicted 0.6 per cent, aligning with broader economic forecasts. Despite the uncertainty outlined in recent reports, CBA maintains its prediction of a 25 basis point cut in May, interpreting the latest inflation findings as consistent with RBA expectations.
Aird added that the board should take a measured approach regarding rate reductions, maintaining their long-term prediction of gradual cuts. They expect a total of 25 basis point cuts each quarter in 2025, projecting a year-end cash rate of 3.35 per cent. Notably, a rate decrease in May could lower repayments for an average borrower by approximately $91 on a $600,000 loan over 25 years, amounting to a potential total reduction of $268 if three cuts are implemented.
Other economists, such as Adelaide Timbrell from ANZ, expressed greater confidence in an impending cut, stating that recent inflation data supports the case for a 0.25 per cent reduction. Timbrell emphasised the negative implications of prevailing trade uncertainties contributing to slower growth rates.
Echoing this sentiment, Krishna Bhimavarapu from State Street Global Advisors echoed the near certainty of a May cut while emphasising the importance of observing any shifts in the RBA’s generally hawkish tone. Meanwhile, Russel Chessler from VanEck noted that while a cut seemed likely, it might not be strictly necessary, citing robust retail sales and an expanding job market.
Luci Ellis, Westpac’s chief economist, indicated that even if there were slight disappointments in the data, a May cut could still be considered “locked in”.
In summary, while the Australian inflation figures present a more complex landscape, the overall expectation remains that the RBA may proceed with a cautious approach to rate cuts, with ongoing discussions and debates among economists on the future trajectory amid economic uncertainties and inflation trends.
