The S&P/ASX 200 Index (ASX: XJO) closed up 0.6% on Wednesday and is up another 0.4% today after yesterday's lower-than-expected inflation print has upped expectations of lower interest rates from the Reserve Bank of Australia.
As we reported here, the ABS data showed that the Aussie consumer price index (CPI) rose 0.2% in the December quarter and 2.4% annually. That was down from the 2.8% annual rise reported in the September quarter.
Now, the RBA's preferred gauge when it comes to its interest rate policies is underlying inflation, also called trimmed mean inflation. This excludes certain volatile items like electricity and petrol.
While higher than core inflation, underlying inflation dropped to 3.2% in the December quarter, down from 3.6% in the September quarter. That's the lowest level in three years and getting quite close to the RBA's target range of 2% to 3%.
ASX 200 investors are now hoping the RBA will cut interest rates at its upcoming meeting on 18 February. That would mark the first easing since November 2020. Australia's official cash rate currently stands at 4.35%, the highest level in 13 years, with the last rate hike delivered in November 2023.
Will Australians see a February RBA interest rate cut?
Well, if you go by majority vote, a February interest rate cut is now looking highly likely.
According to the RBA Rate Indicator, money markets have priced in a 95% chance the RBA will decrease rates to 4.10% at its next meeting, which would come as welcome news to most ASX 200 companies.
Offering his insight on that outlook, Monash University economist Isaac Gross said:
While the unemployment rate remains low, this low inflation should give the RBA scope to cut interest rates at its next meeting and maybe even again in May.
While electricity subsidies and more Commonwealth Rent Assistance helped drive down the inflation rate, the slowdown in inflation extended far beyond these categories as the ABS reports that we saw prices falling in household furnishings, health expenditure, petrol and new houses.
Commenting on the declining CPI news, Luke Fossett, general manager at GoCardless ANZ, said, "While the news is encouraging, it may not quite be enough to prompt the RBA to cut interest rates at their next meeting in February."
Although he has his doubts about a February cut, Fossett added, "These results feel like a turning point for the Australian economy, and a rate cut now seems more likely to occur in the first half of this year."
What are the ASX 200 banks forecasting?
ANZ Group Holdings Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) economists now all expect the RBA will move to ease interest rates in February.
National Australia Bank Ltd (ASX: NAB) was expecting the first cut in May and has yet to revise that forecast.
Explaining why ASX 200 investors could see the first rate cut in 2025 arrive in February, Westpac chief economist Luci Ellis said (quoted by The Australian Financial Review):
With trimmed mean inflation at 0.5% in the quarter [and] 3.2% year-ended, we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the board will have the required confidence to start the rate-cutting phase in February.
But with inflation still having the potential to revive, not everyone is convinced the RBA is in such a hurry to reduce interest rates.
According to KPMG chief economist Brendan Rynne:
The RBA wants to see inflation sustainably within the target band and we are just not there yet. Assuming core inflation continues to fall over the coming months we believe that the RBA will be in a position to cut rates in May, with April a possibility.
Stay tuned!