Recent indicators suggest that the Reserve Bank of Australia (RBA) is likely to implement an interest rate cut within the next two weeks, following a considerable slowdown in underlying inflation. New data from the Australian Bureau of Statistics for May 2023 revealed the monthly consumer price index declined to 2.1 per cent, down from 2.4 per cent in April. This figure falls comfortably within the RBA’s target range and is lower than market expectations, which anticipated a 2.3 per cent rate.
Significantly, the trimmed mean inflation, representing core inflation, also saw a drop from 2.8 per cent to 2.4 per cent, marking its lowest point since November 2021. Although monthly figures are generally regarded as having less weight compared to quarterly data, they are critical as the RBA approaches its interest rate decision set for July 8, just prior to the next quarterly data release.
Economists predict that the RBA may cut the cash rate for the third time this year during its upcoming meeting. Market analyst Josh Gilbert from eToro highlighted that the easing inflation aligns with expectations, potentially serving as a decisive factor for the RBA. He noted that the combination of a slowing job market and cooling prices could prompt the Board to reconsider its stance on interest rates.
Before the release of the inflation data, financial markets indicated an 89 per cent probability of a decrease in the cash rate from 3.85 to 3.60 per cent next month. With the latest figures, analysts believe that market sentiment will further solidify towards a rate cut, which they argue is supported by this favorable inflation print.
Moreover, the recent data suggested declining electricity prices and a slowdown in rental growth, both vital indicators that cost-of-living pressures are diminishing. These trends are significant for the RBA’s monetary policy decisions moving forward.
In summary, as inflation rates demonstrate a notable decline, the likelihood of an interest rate cut by the RBA is increasingly probable, with financial markets actively adjusting to these new economic realities. The upcoming decision will be closely watched as stakeholders assess its implications for the broader economy.