In the latest quarter, inflation was pretty much on par with what experts were expecting. The headline Consumer Price Index (CPI) inflation came in at 1%, which was right in line with predictions. However, the trimmed mean measure of trend inflation, which is a key indicator, was slightly lower at 0.8% compared to the expected 0.9%. Despite this, the overall year-ended inflation rate saw a small increase from 3.6% to 3.8%, but it was in line with what the Reserve Bank of Australia (RBA) had forecasted.
When it comes to making decisions about monetary policy, it’s essential to consider a range of factors, not just inflation numbers. Deputy Governor Hauser recently highlighted that various economic data points, such as the labor market, retail sales, and building approvals, were released leading up to the RBA Board meeting. Although these numbers didn’t provide any significant new insights, the CPI release was crucial.
The lower-than-expected inflation result reinforces the belief that the RBA can afford to keep interest rates steady for the time being. Another quarter of inflation data should confirm that disinflation is progressing as planned, and inflation is on track to return to the target range within the expected timeframe. This would lead the RBA to conclude that there’s no need for tight monetary policy for an extended period.
It’s worth noting that the RBA currently views its monetary policy stance as tight. If the cash rate remains unchanged, inflation could fall below the target range of 2-3%. Monetary policy operates with a delay, so rate cuts need to be implemented before inflation drops too low. If the RBA waits too long, there’s a risk of missing the inflation target without any benefits. Therefore, rate cuts are likely in the near future, assuming inflation continues on the desired path.
Looking at the inflation experiences of other countries, it’s evident that Australia is not facing a unique disinflation situation. The current economic landscape is quite different from 2016 when the RBA and the US Federal Reserve were moving in opposite directions due to varying economic conditions. Now, Australia and its peer economies are all dealing with a common shock, with weak domestic demand growth and pronounced disinflation in discretionary spending areas.
Despite some challenges in the housing sector, such as high rents and construction costs, the overall trend is towards unwinding the pandemic-driven inflation surge. Given the softer-than-expected inflation rate and the broader economic data indicating subdued demand growth, experts are more confident in their prediction of a rate cut in November. However, the RBA is likely to proceed cautiously due to lingering inflation risks.
In conclusion, the RBA is expected to gradually reduce interest rates, with a projected cash rate target of 3.1% by the end of 2025. Beyond that, a period of above-average growth could lead to stability in interest rates. While uncertainties exist, the overall outlook suggests a cautiously optimistic approach to monetary policy in the coming years.
