Industry says CPI print to disappoint April rate cut hopefuls

While Australia’s disinflation process remains on track, market experts see the RBA keeping rates unchanged at next week’s meeting.

The consumer price index (CPI) rose 2.4 per cent in the 12 months to February 2025, according to the latest data from the Australian Bureau of Statistics (ABS). Consensus was for CPI to hold steady at 2.5 per cent.

“Annual CPI inflation was slightly lower in February, after holding steady at 2.5 per cent for the previous two months,” said Michelle Marquardt, ABS head of prices statistics.

The largest contributors to the annual movement were food and non-alcoholic beverages (+3.1 per cent), alcohol and tobacco (+6.7 per cent), and housing (+1.8 per cent).

Annual trimmed mean inflation was 2.7 per cent in February 2025, down slightly from the 2.8 per cent inflation in January and has remained relatively stable for three months.

“The CPI excluding volatile items and holiday travel measure rose 2.7 per cent in the 12 months to February, compared to a 2.9 per cent rise in the 12 months to January,” Marquardt said.

According to CBA senior economist Stephen Wu, both the headline and trimmed mean figure reinforce the case that inflation is beginning to moderate.

“Today’s data gives us more confidence the underlying inflation pulse remained relatively benign. We saw further progress on market services disinflation, as expected,” Wu said in a market update on Wednesday.

The economist added that February also saw better news on the housing front, with new dwelling costs declining by 0.1 per cent in February and annual inflation in new dwelling costs slowing to 1.6 per cent – the slowest annual pace since May 2021.

“To be clear, there remains pockets of elevated inflation,” Wu added. “But these look now increasingly concentrated in administered price changes where outcomes are largely indexed (whether directly or indirectly) to past inflation.”

Wu added that CBA maintains its forecast for the 1Q25 trimmed mean CPI at 0.6 per cent but has revised its forecast for headline CPI from 0.9 per cent to 0.8 per cent for the quarter.

This, Wu said, leaves the bank with a higher conviction for a May rate cut.

“But we do not think it is enough to see the RBA deliver rate relief at its April meeting.”

HSBC’s chief economist, Paul Bloxham, echoed a similar sentiment, stating that Wednesday’s CPI print suggests Australia’s gradual disinflation journey remains on track.

“Today’s print marks the second, and final, partial read on inflation ahead of the official quarterly Q1 CPI print … It is also the last key piece of information ahead of the RBA’s meeting next week,” Bloxham said.

“Overall, the partial readings suggest that underlying inflation is back in the RBA’s 2–3 per cent target band but still remains above the RBA’s target midpoint year-on-year. It also suggests that the disinflation in the trimmed mean in Q1 is tracking broadly in line with the RBA’s latest forecasts.”

Altogether, HSBC’s central case still sees the RBA on hold at its next week’s meeting.

“Beyond today’s monthly CPI print, the RBA will also likely be weighing up a number of recent developments,” Bloxham said.

“For instance, last night’s budget saw the government deliver a range of spending measures, while there is also big change and considerable uncertainty surrounding the global outlook, particularly trade.”

Caught between a budget and a hard place

Indeed, the government’s pre-election federal budget, handed down by Treasurer Jim Chalmers on Tuesday night, appears to have influenced the country’s top economists as they considered how the central bank will view the latest CPI data.

Namely, while noting that stabilisation in the trimmed mean figure is a positive sign overall, VanEck’s head of investments and capital markets, Russel Chesler, said he is not convinced that the “inflation beast has been fully tamed”.

“Yesterday’s budget measures indicate that fiscal and monetary policy continues to be at odds, with a number of measures, including the tax cuts, student debt cuts, and the spending on Medicare and PBS to a lesser extent, likely to be mildly inflationary,” Chesler said.

And with unemployment still proving stubborn, currently at 4.1 per cent, Chesler said sticky services inflation will continue to curb progress in the inflation fight.

“The robust labour market has also limited the wiggle room to absorb any inflation shocks that could arise from the ongoing global tariffs dispute – which could potentially escalate if the universal reciprocal tariffs come into effect next week.”

Ultimately, VanEck doesn’t see the policies laid out by the Treasurer this week as conducive to the RBA changing its current rate cut timeline.

“Our position is unchanged on the likely cadence of no further rate cuts until later in the year and the rate-cutting cycle to be a shallow one overall,” Chesler added.

Meanwhile, Luci Ellis, Westpac’s chief economist, is “sufficiently confident” that the Reserve Bank will keep rates unchanged, at least for now.

“While we still expect a rate cut in May, back-to-back cuts in February and April were never on the table,” Ellis said.

In fact, a surprise loosening decision next week would not bode well for the RBA’s credibility, according to Ellis.

“The RBA was too hawkish in its rhetoric last month for that, and the board made clear that last month’s cut did not foreshadow more.”

Turning to Labor’s pre-election budget, Ellis pointed out that the government’s commitment to a six-month extension to the electricity rebates delays the rebound in CPI inflation.

“The RBA will look through this and continue to focus on trimmed mean inflation. The other tax and spending measures were modest enough that they will not affect the RBA’s view of the outlook materially, even though market pricing did shift a bit on the night,” Ellis added.