Vital clue: Australia heading towards an interest rate cut

A few vocal economists are concerned that inflation will remain high for longer and possibly accelerate again to the point of forcing the Reserve Bank of Australia (RBA) to raise interest rates in the coming months. Some suggest that the 4.35 percent cash rate should be 5 percent or higher to reduce inflation.

This is despite inflation having fallen, as anticipated by the RBA, over the past year. Or that a deep and prolonged slowdown in the economy, which began in mid-2023, will cause unemployment to rise and contain any upward wage pressure (and, yes, lower inflation in the future).

Fortunately, the RBA does not share this scorched-earth view, as evidenced by its decisions to keep interest rates stable over the past six months, including at its May Board meeting.

The RBA’s forecast focused on inflation returning to the 2 to 3 percent target within a reasonable time without further interest rate increases.

In its Monetary Policy Statement, it forecasts that annual inflation will rise to around 3.8 percent for the rest of 2024 before falling back to target in 2025 and 2026.

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RBA Governor Michele Bullock, who warned hopeful mortgage holders that she had not assured an interest rate cut in 2024, said the sharp rise in oil prices explained this rally, and that measures to core inflation forecasts would be significantly below the main measures.

Interestingly, since that forecast was compiled, the global oil price has fallen by about 3 percent, which, if sustained, represents a downside to the overall inflation forecast.

Australia’s inflation fortune teller: look into the crystal ball

What was not covered in detail in the RBA governor’s press conference was the performance of inflation globally.

The story continues

It has been a key issue behind inflation trends in Australia and will be an important factor in the short and medium term.

In that sense, it is generally good news about global inflation. The trend is downward and other major central banks will reach their targets in the next 3 to 12 months.

In recent weeks, there has been a disjunction in the analysis of the inflation rate in Australia and around the world.

As noted, this has led some forecasters to talk about interest rate increases in Australia, while in the eurozone, the United States, Canada, the United Kingdom and New Zealand, slowing inflation is causing money markets to discount the start of a cycle of interest rate cuts from around mid-2024 and through the rest of the year and into 2025.

The table below shows how inflation has moved over the last two years in key global markets, including Australia.

Inflation rate – annual percentage change

Source: Commercial Economy, National Sources

It is clear that from the extreme highs recorded during 2022, inflation was in free fall during 2023.

The latest data, which includes inflation updates for the first months of 2024, show further moderation in inflation in most countries, although it remains marginally above central banks’ targets and the pace of decline has been lower than during 2023.

While the RBA was right to point to a number of domestic news and economic conditions that will be important in the future of Australian interest rates, what happens to global inflation will be vital to the timing and extent of rate moves. of interest.

Just as Australia was a major participant in the inflation rebound in 2021 and 2022, it was part of the fall in inflation from those peak levels.

If inflation continues to decline globally, that will help the RBA with its inflation targets.

Interestingly, if overseas money markets are right in pricing in a strong likelihood of interest rate cuts in most of the world, Australia will likely be part of that and cut too.

In the coming months, while all eyes will be on local economic news from Australia, don’t forget to look at overseas inflation for any leading indicators the RBA can follow.

Interestingly, Switzerland and Sweden have recently reduced their interest rates; The list will increase in the coming months.

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