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A sharper-than-expected drop in inflation coupled with a softening labour market has fuelled expectations that the Reserve Bank of Australia (RBA) will cut interest rates at its upcoming August meeting.
New data from the Australian Bureau of Statistics shows annual headline inflation fell to 2.1% in the June quarter, the lowest level since 2021 and right at the bottom of the RBA’s target range of 2-3%. Meanwhile, the trimmed mean – the RBA’s preferred measure of underlying inflation – dropped to 2.7%, down from 2.9% in the March quarter.
While the RBA opted to hold the cash rate earlier this month, Governor Michele Bullock signalled the board was awaiting confirmation that inflation was on a sustained downward path before making a move.
That confirmation appears to have arrived.
Former RBA assistant governor and current Westpac chief economist Luci Ellis noted the central bank now has “all the data it needs to cut rates,” emphasising the five-week gap between July and August meetings is not critical, “assuming they do actually go forward with a rate cut next month.”
Labour market conditions have also softened, with unemployment rising from 4.1% to 4.3% and job applications hitting record highs. These trends, combined with weak GDP growth, add to the case for easing.
Financial markets are now pricing in a near-certainty of a rate cut in August. Analysts warn, however, that further delays could pose risks due to the delayed effects of monetary policy.
“Monetary policy works with a lag,” Ellis said. “There’s not really a good argument for a continued hold.”
Will the RBA finally pull the trigger on easing? Let us know what you think.
