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Cooling inflation puts February rate cut back in focus

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02:45pm January 29 2025

Westpac economists say the RBA should have enough confidence to start cutting the cash rate at its February meeting. (Getty)

Inflation eased by more than expected in the December quarter prompting Westpac Economists to bring forward their forecast for an RBA rate cut to as soon as February. 

The headline consumer price index (CPI) cooled to an annual rate of 2.4 per cent, below the mid-point of the RBA’s 2-3 per cent target band, while the trimmed mean – closely watched by the RBA as a measure of underlying inflation – fell to 3.2 per cent. Both results were a shade below the forecasts of Westpac economists.  

The data adds to evidence that cost of living pressures are easing for Australian households, with rent and housing prices falling over the quarter. Trimmed mean inflation is now at its lowest annual rate since the start of 2022 when the economy was rebounding from COVID. 

“The better-than-expected inflation data tilts the balance of probabilities back in February’s favour,” Westpac Chief Economist Luci Ellis said in a note.  

“We have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the Board will have the required confidence to start the rate-cutting phase in February.” 

In November, Westpac economists changed their call to a start date of May 2025 following hawkish commentary from the RBA. Still, Ellis said that an earlier move was never ruled out, with much depending on how the economic data played out.  

This trimmed mean inflation result came in at 0.5 per cent for the quarter, which was 0.1 per cent softer than Westpac Economics’ forecast, increasing the likelihood of the CPI could print even lower than the team had forecasted for the March quarter, and putting more stock on rates being cut earlier than Westpac’s original forecast of May. 

Westpac Senior Economist Justin Smirk said the key takeaway from the result was that a 0.2 per cent fall in dwelling prices and a softer than expected 0.6 per cent increase in rents were having the greatest impact on underlying inflation. 

“Looking at the numbers from the monthly series of data, we can see that dwelling prices and rent, so the cost of housing... is actually coming in on the softer side of expectations. 

“That’s suggesting downside risks to what we had forecasted for core inflation through the first half of this year. 

A 0.7 per cent fall in housing and transport costs had the greatest downward pressure on the headline rate of inflation, helped by federal and state government energy rebates. 

“Overall, you can see that the rebates have had a big impact in terms of reducing the cost of living in certain areas, particularly around the housing and energy side of things. 

“But, also, you can see that if those rebates aren't continued, you will get a jump up [in headline inflation] later in this year.” 

Even so, with cost of living pressures easing and a potential rate cut around the corner, things are looking brighter for the Australian economy.  

Liam is a reporter for Westpac Wire. He previously served as a financial journalist for Money Management and as a regional journalist in Nowra for Australian Community Media.

Marina Gainulina (she/her) is a Content Producer for Westpac Wire. Graduating with a Bachelor of Communications & Media (Journalism) degree, Marina has spent a decade as a lifestyle journalist and luxury marketer, crafting commercial and editorial content for global brands including Tiffany & Co., Hugo Boss, NIVEA and GRAZIA.

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