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Australian Inflation Rate Hits Three-Year Low, Raising Hopes for Interest Rate Cuts

Inflation Hits Three-Year Low – What’s Next for Interest Rates?

Inflation Rate Australia Falls to 2.4%

Australia’s inflation rate has dropped to its lowest level in more than three years. The latest data from the Australian Bureau of Statistics (ABS) shows consumer prices rose by just 0.2% in the December quarter, bringing annual inflation down to 2.4%. This is a sharp decline from 2.8% in the September quarter and lower than the 2.5% forecast by economists.

The lower-than-expected data strengthens expectations that the Reserve Bank of Australia (RBA) may cut interest rates at its upcoming meeting in February.

Inflation Hits Three-Year Low – What’s Next for Interest Rates?

Figure 1: Quarterly inflation rate and annual change from the December quarter 2019 to the December quarter 2024.

Key Drivers of Falling Inflation

Several factors contributed to the decline in the Australian inflation rate. The federal government’s energy bill relief played a significant role. Electricity prices fell 9.9% in the December quarter after a 17.3% drop in the previous quarter. Without these rebates, electricity prices would have increased by 0.2%, according to ABS head of prices statistics Michelle Marquardt.

Housing and transport costs also eased. The cost of building new homes fell by 0.2%, bringing the annual growth rate down to 2.9%. This is a dramatic fall from the peak of nearly 21% in mid-2022. Petrol prices also dropped 7.9% compared to a year ago.

Food prices increased by 0.2% for the quarter, driven by higher costs for lamb, bread products, and takeaway meals. However, fruit and vegetable prices fell 3.3% due to better growing conditions for crops like berries, grapes, and salad vegetables.

CPI Australia: Headline vs. Underlying Inflation

The latest CPI Australia figures reveal a broad decline in price pressures. The headline rate of 2.4% sits comfortably within the RBA’s target range of 2–3%.

Underlying inflation, which the RBA closely monitors, also showed improvement. The trimmed mean rate dropped to 3.2% in the December quarter, down from a revised 3.6% in September. This was better than both the 3.3% forecast by economists and the RBA’s previous estimate of 3.4%.

Services inflation, which has remained stubbornly high, fell from 4.6% to 4.3% over the quarter. However, insurance costs continued to rise, increasing by 1.1% in the December quarter and 11% over the past year.

RBA Interest Rate Decision in Focus

The sharp decline in the rate Australia recorded in December has increased speculation that the RBA may cut interest rates as soon as February.

Betashares chief economist David Bassanese believes an interest rate cut is necessary to ease financial pressure on households.

“There’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings. I anticipate the Reserve Bank will welcome these inflation results and reward hard-pressed households and mortgage holders with an interest rate cut at the February 17–18 policy meeting,” he said.

Prior to the release of the inflation data, investors had priced in an 84% chance of a rate cut at the RBA’s February meeting. Bendigo Bank chief economist David Robertson expects multiple cuts in 2025.

“The slightly lower-than-expected Q4 inflation data opens the door for a February RBA rate cut and validates our forecast of three cuts in 2025,” Robertson said.

However, some economists remain cautious. RSM Australia’s Devika Shivadekar believes the RBA may wait for more data before cutting rates.

“A rate cut is still on the table for the February RBA policy meeting, with the likelihood evenly split but skewing slightly towards a hold in our opinion,” she said.

Political Reactions to the Inflation Data

Treasurer Jim Chalmers welcomed the latest CPI Australia figures, calling them a positive sign for the economy.

“These are very welcome developments. We don’t pretend it is mission accomplished on inflation but we are making very substantial progress,” Chalmers said.

He added that the “worst of the inflation challenge is now well and truly behind us” and predicted a soft landing for the economy.

Shadow Treasurer Angus Taylor criticised the government’s handling of the economy, arguing that Australians were still struggling with the cost of living.

“We see the inflation out today and we see that core inflation is stubbornly above target,” Taylor said.

He accused Chalmers of “patting himself on the back” while Australians continued to face financial pressures.

What’s Next for Interest Rates Australia?

The RBA will hold its first meeting of the year on February 17–18. The latest inflation data has strengthened the case for an interest rate cut, but the central bank may still take a cautious approach.

With inflation now within the RBA’s target range and economic growth slowing, the pressure to lower interest rates in Australia is growing. However, the RBA will likely consider employment data, wage growth, and global economic conditions before making its decision.

If the RBA decides to cut rates in February, it could provide much-needed relief for mortgage holders and businesses. But if it holds rates steady, markets will turn their attention to the next meeting in April.

For now, the latest inflation data suggests Australia is moving closer to the end of its high-interest-rate cycle.

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