Australia has been a global outlier in the current easing cycle as most developed world central banks, including the Federal Reserve, have already cut substantially. The Fed is due to announce the outcome of its meeting later today and is expected to stand pat. The RBA, in tackling inflation through 2022-23, opted for a lower peak rate than global counterparts. It worried about the capacity of heavily-geared households to cope with significantly higher mortgage repayments.
But we got a softer-than-expected annual underlying inflation figure of 3.2 per cent for the 3 months to December from the ABS today, and the journos are out in force saying a rate cut from the RBA is February is all but certain now, which of course would be welcomed by households who are mortgaged to the hilt, and music to the ears of politicians ahead of the election. Not so good for savers mind you.
The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.2% in the three months through December, compared with an expected 3.3% gain and on a quarterly basis, core consumer prices rose 0.5% versus a forecast 0.6%.
Economists at Westpac, Royal Bank of Canada, TD Securities and AMP all brought forward their calls for the first Reserve Bank cut to February. Goldman Sachs which was already predicting February and May rate reductions, now sees an easing in April as well.
But not so fast, because whilst the number landed in a place to make next month’s Reserve Bank of Australia board meeting a cliffhanger, there is still a case to do nothing. And whilst the market has gone all with an 80 to 90 per cent chance of a cut, there is also a reasonable case to hold steady and await more information on the economy. So perhaps it’s more like 50-50.
But given the breadth and depth of government cost of living support, with energy bills credits, rent assistance, 50¢ public transport in Queensland and a revision to a previously mismeasured childcare subsidy even the trimmed mean has been distorted by the huge breadth of government subsidies in the December quarter.
Contrary to common perception, subsidies can affect underlying inflation and could accelerate the RBA cutting interest rates, even if the grounds for doing so may be dubious. Chalmers and Treasury may have outmanoeuvred the RBA. Hence, the lingering doubts about a rate cut relate to whether the RBA board feels confident enough about disinflation based on a sole quarterly number.
So, the key question is, will the politically driven handouts which have been spayed about the place liberally, and sufficient to mask inflation even in the trimmed numbers drive the RBA to cut, in which case politics ahead of the election will have won, at the expense of tax payers, who know the true inflation costs are still way higher than numerwanged. And then of course we have the impact of the lower exchange rate to content with ahead, which could also be inflationary. So a 50 50 call for February, but perhaps politics have won, for now.
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