A senior Reserve Bank official has said that expectations of inflation stabilizing and easing increase the likelihood of interest rate cuts.
RBA Assistant Governor (Economic) Sarah Hunter told the Citi Australia and New Zealand Investment Conference in Sydney on Wednesday that “expectations contribute to actual inflation outcomes”.
She said market expectations of long-term inflation had begun to decline and this had happened faster than RBA models had predicted.
“There is no evidence that expectations are more persistent than normal,” she said, according to a report The Australian..
“There is even evidence that households and unions extrapolate less from recent inflation, at least during the period of higher inflation.”
Ms Hunter said low and stable inflation was “critical to maintaining macroeconomic stability”. When companies have confidence in stable prices, they can better plan for investments and expansion.
“Volatility creates uncertainty, and uncertainty makes decisions harder for everyone,” she said.
The RBA has repeatedly emphasized that inflation must fall below three percent before official cash rates – and therefore mortgage rates – can fall.
RBA Assistant Governor (Economic) Sarah Hunter has told an investment conference that inflation expectations are stabilizing and easing
In August, the consumer price index, also known as headline inflation, fell to 2.7 percent in August, a sharp decline from 3.5 percent in July.
This was the lowest monthly inflation rate since August 2021, when Sydney and Melbourne were still in lockdown.
However, the decline was largely a result of the federal government’s $300 energy rebates that went into effect July 1, along with generous electricity assistance programs from the state government.
Ms Hunter’s comments offer some hope that the RBA could cut rates while inflation appears more subdued
Gasoline prices were also down 7.6 percent over the year, but fuel prices are inherently volatile and could soon rise just as quickly.
Reserve Bank of Australia Governor Michele Bullock warned that a big drop in headline inflation – including volatile price items – would not lead to a rate cut in 2024, saying the drops in fuel prices and subsidized energy prices were temporary.
“Based on current forecasts, the headline inflation rate could actually – after 12 months – fall below 3 percent,” Ms Bullock told reporters late last month.
‘That’s important because it reflects the easing of the cost of living and is therefore reflected in the prices that people see.
“But it doesn’t really reflect the underlying inflation pulse, but more, what are we actually seeing happening with the services sector, and that’s the crux of the matter.”
However, financial markets are optimistic about longer-term interest rate cuts, with major banks predicting four in 2025.
The interbank futures market is indicating expectations that the Reserve Bank will start cutting interest rates in March from the existing 12-year high of 4.35 percent.
A cut of four quarter points in 2025 would bring the cash rate back to 3.35 percent for the first time since March 2023, partially reversing the RBA’s 13 increases in 2022 and 2023.
This means that borrowers who fix their mortgage interest rate for several years must pay a hefty termination fee if they ask their lender to switch to a lower variable interest rate.
New Zealand has already cut central bank interest rates twice this year, while 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 at the Reserve Bank of Australia, said central bank interest rates were likely to be higher in the 2020s than in the 2010s, even with expected rate cuts next year.