Australia’s inflation is back in the Reserve Bank’s target band, and economists are now asking not whether the cash rate will be cut in August, but by how much.
New figures from the Australian Bureau of Statistics show that headline inflation for the June quarter has dropped to 2.1 percent. Monthly data for June puts the figure even lower, at 1.9 percent—the lowest in over three years. Underlying inflation, measured by the trimmed mean, came in at 2.7 percent annually and just 0.6 percent for the quarter.
Treasurer Jim Chalmers welcomed the data, calling it “an outstanding result” and a sign that inflation is “substantially lower” and “sustainably in the band.” When Labor came to office, he noted, headline inflation was running at 6.1 percent. Now it’s about a third of that. Trimmed mean inflation has also halved in that time.
“Inflation is falling, unemployment is low, real wages and living standards are growing again,” Chalmers said. “More than 1.1 million jobs have been created, debt is down, the economy is growing and interest rates are falling.”
He pointed to the moderation in services inflation, now down to 3.3 percent annually, as one of the main reasons inflation has returned to the band. That figure, he said, is near its long-run average and marks the lowest reading for services inflation in three years.
Chalmers also made a case for the government’s cost of living measures, citing ABS data that shows electricity prices would have risen by 1.7 percent without energy rebates, but instead fell 6.2 percent. Rent inflation was also held down, with increases in Commonwealth Rent Assistance dampening what would have been a larger annual rise.
Despite the progress, Chalmers struck a cautious tone. “There’s more to do,” he said. “The global environment is uncertain, structural issues in our economy are persistent, and people are still under pressure.”
That uncertainty is echoed by the Reserve Bank’s next decision, due on 12 August. With inflation now inside the target range, pressure is mounting for a rate cut. David Robertson, Chief Economist at Bendigo Bank, says a cut is all but locked in.
“The question now is how big the cut will be,” Robertson said. “This should assure an RBA rate cut in August, and potentially opens the door for a larger cut than the normal 25 basis points.”
Robertson noted that quarterly headline inflation rose just 0.7 percent, and that the June monthly indicator shows trimmed mean inflation at 2.4 percent. With unemployment now ticking up to 4.3 percent, he argues the case for easing is stronger.
A full 50 basis points cut may be off the table, given RBA Governor Michele Bullock’s recent remarks about staying consistent. But a 35 basis points move, taking the cash rate down to 3.5 percent, is being floated as a possible compromise.
Stephen Koukoulas, another prominent economist, was blunt in his assessment: “Annual trimmed mean inflation now 2.1 percent; headline inflation 1.9 percent. Cash rate at 3.85 percent is massively too high. Real interest rates are hugely restrictive.”
His warning highlights the delicate position the RBA now finds itself in. If rates stay too high while inflation falls further, the economy could slow faster than anticipated.
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