RBA's rate cut outlook uncertain despite 'good news' CPI print

While some see Wednesday’s monthly CPI report as “good news” for the RBA, others don’t expect additional rate cuts in coming months.

The consumer price index (CPI) rose 2.5 per cent in the 12 months to January 2025, according to the latest data from the Australian Bureau of Statistics (ABS).

“Annual CPI inflation at 2.5 per cent in January was the same as it was in December 2024,” said Michelle Marquardt, ABS head of prices statistics.

The largest contributors to the annual movement in CPI were food and non-alcoholic beverages (+3.3 per cent), housing (+2.1 per cent), and alcohol and tobacco (+6.4 per cent).

Commenting on the data, Betashares’ chief economist, David Bassanese, noted that the headline figure is comfortably within the Reserve Bank of Australia’s (RBA) 2–3 per cent target band, albeit in part due to the impact of electricity rebates.

“The best news, however, was that the annual trimmed mean inflation rate only bounced back modestly,” Bassanese said.

Annual trimmed mean inflation was 2.8 per cent in January, up slightly from 2.7 per cent in December.

This, the chief economist said, bodes well for another encouraging quarterly CPI report come April.

“Of course, the monthly CPI can be notoriously volatile and there’s still scope for it to bounce back further in February and March,” he added.

In the RBA’s Statement on Monetary Policy last week, following its first rate cut in over four years, the central bank said that annual trimmed mean inflation would drop from 3.2 per cent in the December quarter, to 2.7 per cent by the June quarter.

“If right, that should be consistent with another interest rate cut at least by the time of the August monetary policy meeting,” Bassanese said.

However, the economist noted that there’s also room to cut interest rates as early as May if, as he expects, the March quarter CPI shows a decline in annual trimmed mean inflation to at least 3 per cent or less.

“After all, the official cash rate is still at restrictive levels and further interest rate cuts at this stage still only involves easing back on the level of policy restrictiveness – taking the foot of the brake rather than pushing down on the accelerator,” he said, adding that his base case remains at least two more rate cuts this year – in May and August.

CreditorWatch chief economist Ivan Colhoun similarly sees May as the “next most likely time” for another 25 basis point rate reduction.

“There were pleasing signs in the January CPI that suggest the RBA’s inflation forecast will be bettered and the RBA will be able to provide some further interest rate relief to households and businesses, most likely at its May board meeting,” he said.

“The RBA will cut interest rates further if inflation comes in below its forecast and/or unemployment rises above 4.2 per cent, both of which seem likely, though by fine margins. This suggests a further two or three rate reductions this cycle are likely,” Colhoun said.

Last week, speaking before the House of Representatives economics committee, RBA governor Michele Bullock admitted that the RBA was slow to respond to rising inflation in the past, a factor that contributed to its decision to implement a rate cut last Tuesday.

“The board doesn’t want to be late,” the governor said.

“Arguably, we were late in raising interest rates on the way up, we didn’t respond as quickly as we should have to rising inflation,” she added, alluding to then RBA governor Philip Lowe’s first cash rate hike in May 2022, which came months after many other central banks had already taken action.

“I think the board has been quite cognisant of the fact … That if we’re going to start reducing interest rates, then we need to be thinking of doing it not when we are already back in the [inflation target] band, but as we start to get more confidence that we’re coming back to the band,” Bullock said.

Walking on eggshells in 2025

While some market experts see the latest CPI print as good news for the RBA, VanEck is not convinced that the bigger picture makes a strong enough case for further rate cuts in coming months.

"While market consensus has shifted towards an 80 per cent probability of the next cut being in May, we don’t see this happening until later in the year,” highlighted VanEck’s head of investments, Russel Chesler.

Chesler iterated that the RBA’s rate cut earlier this month does not mean that inflation is under control. Instead, he suggested, “we’re going to be walking on eggshells for the rest of the year until we’ve had a solid run of lowered inflation”.

“Although eggshells are getting harder to come by, with soaring egg prices due to the avian flu. In the US, the Fed has cut 100 basis points off the federal funds rate since September, and it’s now seeing inflation starting to pick up again,” he said.

Amid stubborn unemployment, robust retail sales and the government’s continued spending spree, VanEck said it hasn’t seen any additional data to support the case for another rate cut in coming months.

“We still have a very tight labour market and there is a chance it could get hotter. Job ads increased in December 2024 and January 2025, according to the ANZ job ads report, and with the recent rate cut, employment opportunities could increase further off the back of increased business confidence in the stability of the economy," Chesler said.