Money markets are pricing some 70% chance the Reserve Bank of Australia will cut the target rate at its Feb 17 and 18 meeting. — Bloomberg
SYDNEY: Australia’s quarterly inflation data this week may be key to whether the central bank finally embarks on a monetary easing cycle soon, and in turn, help decide the timing of an election due by May 17.
While money markets are pricing some 70% chance the Reserve Bank of Australia (RBA) will cut the target rate at its Feb 17 and 18 meeting, a lot depends on price data of the last quarter scheduled for release today.
Economists expect the trimmed mean inflation – the more closely watched gauge less affected by the impact of recent government rebates – to have eased to 3.3%, a three-year low.
Cooling inflation offers some relief for Prime Minister Anthony Albanese, whose Labour government is neck-and-neck with the opposition in polls ahead of the ballot.
With Australians getting more frustrated with housing and other price pressures, an RBA decision to lower borrowing costs from a 13-year high may give the increasingly unpopular Albanese scope to call a vote before May.
Slowing price gains would also vindicate the government’s populist move to provide energy and rental subsidies to ease the burden on households.
In Canberra, there’s growing consensus that the government will hold the election after the RBA’s April 1 decision in the hope of securing at least one rate cut before the ballot.
The RBA has held the key rate at 4.35% for the past 14 months and is the only major central bank yet to cut, excluding Bank of Japan that’s on a tightening cycle.
“If core inflation is at or below expectations, the political narrative will clearly be the government saying: ‘we have done a great job on this, we don’t need contractionary monetary policy anymore’,” according to Robert Brooks from the Department of Econometrics and Business Statistics at Monash University.
He expects Albanese to wait for RBA’s February decision before calling the election.
Albanese himself hasn’t given anything away on the election timing although he has been actively campaigning.
The Prime Minister’s disapproval rating of 57% is higher than opposition leader Peter Dutton’s 51% in Newspoll’s latest survey.
The key inflation measure easing in line with expectations will also beat the RBA’s 3.4% estimate.
Some economists believe that could pave the way for a February rate cut. Still, others are sceptical.
HSBC Holdings Plc said in a note on Monday that employment data are also important, citing the strong jobs report in December.
Headline inflation, which has been partly restrained by state and federal government rebates, probably cooled last quarter to 2.5%, the midpoint of the RBA’s 2% to 3% target.
An analysis by Westpac Banking Corp suggested that rebates shaved 0.4 percentage point off the headline print in the third quarter and a further 0.3 in October to December.
Average inflation in 2024 would have been 3.2% rather than the estimated 2.5% without the rebates.
“Any headline inflation with a two in front of it shows that inflation has more than halved since we came to government,” Treasurer Jim Chalmers said in a statement. — Bloomberg
