A senior Reserve Bank official says inflation expectations are stabilizing, making rate cuts more likely.
RBA deputy governor for economic policy Sarah Hunter noted that “expectations influence actual inflation outcomes.”
He said financial markets expected inflation to fall at a faster rate than RBA models had predicted.
“There is no evidence that expectations are more persistent than normal,” he said at the Citi Australia and New Zealand Investment Conference in Sydney on Wednesday.
“There is even some evidence that households and unions extrapolate less from recent inflation, at least during the period of higher inflation.”
Hunter said having low and stable inflation is “critical to preserving macroeconomic stability” and that if companies relied on stable prices, it would allow them to better plan investment and expansion.
“Volatility creates uncertainty, and uncertainty makes decisions more difficult for everyone,” he said.
Reserve Bank Governor Michele Bullock has repeatedly stressed that there will be no rate cuts in 2024, even though the US, UK, Canada, New Zealand and the EU have already cut rates this year.
Australia’s core inflation rate – discounting large price movements – is still above the Reserve Bank’s 2 to 3 per cent target.
But Ms Hunter’s speech is a sign that the Reserve Bank is now more open-minded about cutting rates, with the RBA considering another hike in August.
RBA deputy governor (economic) Sarah Hunter told an investment conference that inflation expectations are stabilizing and declining.
In August, the consumer price index, also known as headline inflation, fell to 2.7 percent in August, which was a sharp drop from 3.5 percent in July.
This was the lowest monthly headline inflation rate since August 2021, when Sydney and Melbourne were still in lockdown.
However, the drop was largely the result of the federal government’s $300 energy rebates that went into effect July 1, along with the state government’s generous electric aid programs.
Gasoline prices also fell 7.6 percent over the year; However, the price of fuel is inherently volatile and could soon rise just as quickly.
Reserve Bank of Australia Governor Michele Bullock warned that a big drop in headline inflation – which includes volatile price elements – would not lead to a rate cut in 2024 because falls in fuel prices and subsidized energy were temporary.
“It may well be due to current forecasts that the headline inflation rate is in fact – at the end of 12 months – below 3 per cent,” Ms Bullock told reporters late last month.
‘That is important because it reflects a relief in the cost of living, so it is reflected in the prices that people see.
Ms Hunter’s comments offer some hope that the RBA can reduce interest rates when inflation appears to be more subdued.
“But it doesn’t really reflect the pulse of underlying inflation, meaning what we’re seeing really happening with services, which is the crux of the issue.”
However, financial markets are optimistic about long-term rate cuts, with major banks predicting four in 2025.
The interbank futures market indicates an expectation that the Reserve Bank will begin cutting rates in March from a 12-year high of 4.35 percent.
Four quarter-point cuts in 2025 would return the cash rate to 3.35 per cent for the first time since March 2023, partially undoing the RBA’s 13 increases in 2022 and 2023.
This means that borrowers who lock in their mortgage rate for several years would incur a hefty break fee if they ask their lender to switch to a lower variable rate.
New Zealand has already cut the central bank’s cash rate twice this year, and its counterparts in the US, UK, Canada and European Union will also ease monetary policy in 2024.
But Westpac chief economist Luci Ellis, a former assistant governor of the Reserve Bank of Australia, said central bank interest rates would likely be higher in the 2020s than in the 2010s, even with the cuts. rates expected next year.
