Australian Qtr Inflation Data to Influence RBA's Year-End Rate Decision

The official inflation data to be released later this month may ultimately determine whether the Reserve Bank of Australia (RBA) will cut interest rates before the end of the year. However, the Commonwealth Bank of Australia (CBA) is increasingly convinced that inflation is slowing down faster than the RBA anticipated.

Earlier this year, economists and traders widely believed that Australia might cut interest rates before the end of the year due to the United States returning to deflation and other central banks also starting to ease monetary policy. However, even though the Federal Reserve cut interest rates by 50 basis points last month, and most other Western economies, including New Zealand, continued to cut interest rates, the RBA remained tough, leading to few people now predicting that the central bank will cut interest rates before February next year.

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CBA is the only major bank that still expects the RBA to cut interest rates before the end of the year. According to the RBA's guidance, economists have seen February as the most likely starting date. The market predicts a 50 basis point cut by July 2025 and a total of 75 basis points by the end of 2025.

According to Westpac's data, Australian consumer confidence soared to its highest point in more than two years this month.

Gareth Aird, CBA's head of Australian economics, noted that the survey shows that "the expected deflation process has gathered momentum," but he still needs to wait for the quarterly official CPI inflation data to confirm his assessment.

The data will be released on October 30th.

He noted a significant decline in the Melbourne Institute's inflation indicator, the final price indicator in the NAB monthly business survey, and the output price in the S&P/Judo Bank Purchasing Managers' Index, as well as a sharp decline in the growth rate of advertised rents mentioned in the RBA's meeting minutes.Aird stated, "All the series data we monitor indicate that the deceleration of inflation in the third quarter has gained momentum."

The RBA aims to maintain the highest possible level of employment, consistent with its long-term consumer inflation stability target of 2-3%, rather than setting a target on how much gain the labor market can retain.

"If inflation falls faster than expected, the labor market may not require further easing, as a lower unemployment rate may be consistent with the inflation target," he said.

Aird stated: "If the semi-annualized core inflation rate is around 3%, the overall inflation rate is within the target range, and the unemployment rate is gradually increasing, then the rationale for not beginning to normalize the cash rate will be significantly weakened."