Australia Inflation May Decide RBA Rate Cut, Election Timing
(Bloomberg) -- Australia’s quarterly inflation data this week may be key to whether the Reserve 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 about an 80% chance the RBA will cut the cash rate at its Feb. 17-18 meeting, much depends on price data scheduled for release on Wednesday. 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.
For Prime Minister Anthony Albanese, cooling inflation would be a fillip for his Labor government which is running neck-and-neck in polls with the opposition ahead of the election. With Australians increasingly frustrated by housing and cost-of-living pressures, an RBA decision to lower borrowing costs from a 13-year high would be a tailwind for Albanese heading into the campaign.
Slowing price gains would also vindicate the government’s decision 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 the Bank of Japan that’s in 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 who expects Albanese to wait for the 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 would also beat the RBA’s 3.4% estimate. Some economists believe that could pave the way for a February rate cut. Still, others are skeptical. 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 2-3% target.
An analysis by Westpac Banking Corp. suggests that rebates shaved 0.4 percentage point off the headline print in the third quarter and a further 0.3 in October-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 ahead of the data, adding that it would also be within the RBA’s target band.
Data on Tuesday showed Australia’s business conditions rebounded to near their long-run average, driven by the retail sector as consumer spending picked up. The report also showed that capacity utilization rose to 82.8% in December, suggesting economy-wide demand still exceeds supply.
That is partly due to elevated government spending — both federal and state. Robust demand is also keeping services inflation sticky and the labor market strong, with unemployment hovering around 4%.
Some economists worry that both sides of politics will unleash major spending initiatives during the election campaign given the tightness of the race.
Meanwhile, currency weakness could fuel imported inflation.
The Australian dollar fell more than 10% in the final three months of last year, a period that included the Nov. 5 election victory of Donald Trump that sent the greenback soaring. The Aussie has since recovered some ground, though like other currencies, it remains heavily influenced by US tariff signals.
UBS Group AG, Citigroup Inc. and Westpac reckon policymakers will wait a few more months before easing. Even those predicting a cut next month have their doubts.
“A hold in February is not off the table if the RBA puts more weight on its concerns that the persistent tightness in the labor market and expected recovery in household spending growth still pose upside risks to inflation,” said Catherine Birch, a senior economist at ANZ Bank.
And even when the RBA does start to cut, most economists, including Birch, expect the cycle will be fairly short and shallow.
“The RBA will take a cautious approach in dialing down the restrictiveness of current policy settings,” she said.
--With assistance from Ben Westcott.
(Adds business confidence survey in 12th paragraph.)