Australia could see a rate cut by Christmas, according to AMP chief economist Shane Oliver, if consumer price index (CPI) inflation falls faster than expected.
Last month, the Australian Bureau of Statistics announced that monthly CPI inflation fell from 3.7 per cent to 3.5 per cent in July, driven by the introduction of Commonwealth and state rebates in Queensland, Western Australia and Tasmania.
This would leave inflation on track to fall to 2.9 per cent year-on-year for the September quarter.
Commenting on the figures, Oliver said the Reserve Bank of Australia (RBA) has indicated there will be no rate hike in the short term, but there are questions over what time span this covers.
“Our base case remains for the first rate cut starting in February as the RBA is unlikely to be confident enough about inflation falling to target, until then to start cutting,” Oliver said.
Nevertheless, there is a chance that the RBA could look to make a rate cut at its meeting on 10 December if inflation falls faster than the estimates.
“As we saw in 2021–22 with the ‘no rate hike before 2024’ guidance, if the facts change the RBA will change as their current guidance is predicated on ‘what the board knows at present’.
“And we have seen that this year with other central banks globally that have pivoted to rate cuts. The same could easily happen in Australia if we saw a faster than expected fall in inflation, a sharp rise in unemployment, or a financial shock. None of these are our base case but they are a high risk, so a pre-Christmas cut is possible.”
Overseas, the Bank of England, European Central Bank, Bank of Canada and Reserve Bank of New Zealand have all begun their rate cutting cycle, but the Federal Reserve is currently paused, although there are expectations for it to start cutting them at its September meeting.
Oliver previously shared five reasons why he believes the next move by the RBA will be a cut.
These are:
- Monetary policy remains restrictive.
- The full impact of past rate hikes is still feeding through.
- Recession risks are high as indicated by the ongoing slump in real household spending per capita and slowing population growth, which will add to the risk.
- Forward-looking jobs indicators warn of a significant further rise in unemployment ahead.
- Wages’ growth has peaked which will slow underlying services inflation.
