One of Australia’s major banks has declared the “proverbial inflation dragon has been slayed” as the Reserve Bank of Australia is set to hand down another interest rate cut next week.
Inflation soared after the pandemic, rising from three per cent in September 2021 to its post-COVID peak at 7.8 per cent in December 2022.
While inflation gradually fell over the coming two years to eventually sit within the RBA’s target band, trimmed mean inflation – the middle 70 per cent of price changes core to the RBA’s decision – only dropped to the band in March.
The inflation drop comes as welcome news for the RBA as it looks to deliver mortgage holders their second hit of financial relief this year, Commonwealth Bank of Australia’s head of Australian economics Gareth Aird said.
“It means that lingering upside inflation risks to the RBA’s forecast did not materialise. And that will give the Board more confidence that the inflation ‘fight’ is being won,” Mr Aird said.
“Our view is that the proverbial inflation dragon has been slayed.
“But we are not convinced the RBA will share that view just yet given the unemployment rate is still below the RBA’s estimate of the NAIRU (non-accelerating inflation rate of unemployment).”
The Australian Bureau of Statistics revealed Australia’s unemployment rate – a key piece of data central to the RBA’s cash rate call – remained steady at 4.1 per cent in April.
Australia’s jobless rate continues to sit near historic lows, a sign the RBA would hold or hike rates, but inflation’s steady decline and concerns around the global economic turmoil from Donald Trump’s trade war could push the central bank towards a cut next week.
Alongside this, Mr Aird said the RBA’s models imply the NAIRU is closer to 4.5 per cent but noted the central bank would be open to the unemployment rate being more in line with the ABS figure.
RBA Governor Michele Bullock made this comment after the central bank held rates in April.
“We are alert to the fact that it (i.e. the labour market) might not be quite as tight as that and we can sustain an unemployment rate down around these levels without adding to inflation pressure,” Ms Bullock said.
“That would be great. But we are still alert to the possibility that it might still be a little bit tight and that might put wages under upward pressure and, hence, inflation.”
Sky News’ Business Editor Ross Greenwood said Thursday’s unemployment data will be critical for the millions of Australians hoping for further financial relief.
“This is the last piece of the puzzle before the Reserve Bank makes its call on interest rates next week,” Greenwood said.
While the chance of a 0.25 per cent rate cut still remains very high, it has fallen from 95 per cent to 89 per cent since the jobless rate was revealed to have steadied.
Though CommBank has claimed the inflation “dragon has been slayed”, the cumulative impact of the price rises means Aussies pay 17.5 per cent more than what they did about three and a half years.
The RBA held the cash rate was held at 4.35 per cent for more than a year as post-pandemic inflation slowly cooled.
That pause followed the RBA hiked rates 13 times from May 2022, over the period of about a year and a half, to stamp out soaring price pressures.
