Cooling inflation opens door to February rate cut
The fourth-quarter consumer price index (CPI) released this week opened the door for the Reserve Bank board to begin lowering the cash rate in February.??
Heading into this week’s release, market pricing indicated a close to 80% probability of a 25-basis point cut in February.??
The release confirmed inflation is moving lower, with the trimmed mean inflation measure undershooting the RBA's expectations and confirming an accelerated disinflation pulse into the end of 2024.??
This undershoot is expected to give the Reserve Bank confidence in beginning the rate-cutting cycle in February, with underlying inflation on track to return sustainably to the RBA's 2-3% target.??
In the 12 months to the December 2024 quarter, the headline CPI rose 2.4%. It was the lowest annual rise since the March 2021 quarter and lowest quarterly rise (0.2%) since June 2020. Price declines for electricity and petrol, and moderating price rises for new dwellings drove the falls.?
Although headline inflation is trending down, the recent falls have been aided by electricity rebates and other cost of living relief measures offered by the federal and state governments and are therefore not reflective of underlying price pressures. As a result, the RBA is focused on underlying inflation returning to the 2-3% target band.?
The RBA's preferred measure of underlying inflation, the trimmed mean CPI, rose by 0.5% in Q4 2024. The quarterly rise of 0.5%, the lowest quarterly result since Q2 2021, represents an annualized pace of 2.1%, putting trimmed mean inflation back within the 2-3% band at the end of 2024.??
The annual pace of trimmed mean inflation eased to 3.2% year-on-year in Q4, from the down from the 3.6% annual rise posted in the previous quarter.??
This puts underlying inflation at the lowest level since December 2021, and below the Reserve Bank’s forecast of 3.4%, giving the RBA reason to re-evaluate the strength of underlying inflation and increasing confidence in achieving a sustained return to target.?
Although the odds of a rate cut in February 2025 are high, given the strength of the labour market there is a possibility this timing could be extended to April or May, allowing the RBA more time to assess relevant economic indicators.?
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This uncertainty around the timing of rate cuts likely remains a concern for some buyers, but others may look to pre-empt cuts and transact now with the expectation of price rises following rate cuts.?
Historically, before interest rates begin to move lower has been viewed as a good time to buy. We typically see home prices lift with buyer confidence and borrowing capacities boosted as rates fall.??
Though prices are likely to move higher this year as interest rates move lower and boost borrowing capacities, given the stretched starting point for affordability, the price uplift could be more muted compared to prior easing cycles.?
With interest rate cuts on the horizon, the price falls seen in the past month are likely to be short lived.?
As interest rates move lower this year, improving affordability and buyer confidence are expected to drive renewed demand and price growth.??
However, the stretched starting point for affordability will likely dampen the uplift in prices compared to prior easing cycles, resulting in the pace of home price growth trailing the strong performance of recent years.?
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