Benign Inflation Data boosts odds of February Rate Cut: Marc Jocum, Global X ETFs
Marc Jocum (pictured), Investment Strategist at Global X ETFs, has analysed the release of the lowest annualised consumer price inflation in over three and a half years.
Australian annualised CPI fell to 2.4% in December 2024 from 2.8% in September 2024. Australian CPI Trimmed Mean decreased to 3.2% in December 2024 from 3.5%, slightly beating economists’ predictions of 3.3%.
Marc Jocum said, “Looking at this benign CPI data, a February rate cut is not 100% guaranteed, but it is now more likely than not. In the week prior to the CPI announcement, markets were pricing in a 70-80% chance the RBA will cut in February, but that rose to over 90% after this softer-than-expected CPI report.
“Markets are now pricing that the cash rate will be around 3.6% by the end of the year, implying 75 basis point of rate cuts over the next eight RBA meetings,” Jocum said.
“A potential rate cut by the RBA in February could serve as a lifeline for Albanese ahead of May’s election, shaping the political narrative that his government has ‘successfully’ eased cost-of-living pressures, albeit it has been prolonged, and subsidies have masked some of the underlying pressures.”
Various energy rebates and cost-of-living assistance have contributed to keeping headline inflation within the target band, making the trimmed mean inflation figure a more critical metric to monitor.
“While headline inflation has fallen from a peak of 7.8% in December 2022 to 2.4%, many might think that because this sits nicely in the RBA’s target band of 2% to 3%, a cut in interest rates is warranted,” Jocum added.
“If a shift does occur, it is likely to unfold as a gradual easing cycle, reminiscent of the 2011-2013 period in Australia when we saw steady 25 basis point reductions. This approach aligns with the cutting pattern adopted by other developed market central banks over the past year. Notably, the RBA remains the only major central bank yet to cut interest rates, aside from the Bank of Japan. Given that the RBA implemented less aggressive rate hikes compared to other central banks, its policy settings could provide less scope for meaningful rate cuts.
“In addition, December’s strong jobs report highlighted robust labour market growth and a low unemployment rate, indicating that a February rate cut is not 100% guaranteed, though more likely than not. While the unemployment rate has risen slightly from a low of 3.5% in December 2022 to 4% last quarter, it remains below the long-term historical average. Given the RBA’s dual mandate of price stability and full employment, the central bank’s decision may hinge on balancing these two priorities given the tight labour market,” Jocum said.
“Of some concern also, services inflation remains persistent at 4.3%, compared to goods inflation at 0.8%, driven by higher rental expenses, medical and hospital services, and insurance costs.”
