Australian inflation plunges to 3.2%, signaling RBA rate cut

Australian inflation has dipped to a three year low of 3.2 per cent, paving way for a much expected rate cut the following month, offering the government a boost ahead of a cost of living election.
The Reserve Bank of Australia’s (RBA) preferred inflation measure, which excludes volatile price swings, dropped to an annual 3.2 per cent for the December quarter, down from 3.5 per cent.
Economists further predict that the dip would be enough to prompt the central bank to lower interest rates, indicating that inflation is finally under control and relieving mortgage holders.
The broader consumer price index (CPI), which includes factors such as government-rebated electricity bills, also declined, falling to 2.4 per cent from 2.8 per cent in the previous quarter. Despite inflation easing, the RBA’s official cash rate remains at 4.35 per cent, where it has sat since November 2023, according to news agency The Guardian.
The last rate cut occurred in November 2020 as part of efforts to support the economy during the COVID-19 pandemic.
While inflation has not dropped as quickly as the RBA had hoped, it has steadily declined from its peak of 7.8 per cent in 2022, when Australian households struggled with soaring prices for essential goods.
Analysts believe that the RBA may now have room to ease its monetary policy to prevent a downturn in the job market and avoid tipping the economy into recession.
Saxo Bank’s Asia Pacific senior sales trader Junvum Kim said, “This softer-than-expected inflation data could amplify expectations for a February RBA rate cut and bolster the Reserve Bank’s confidence in steering inflation back to its target within a reasonable timeframe.”
With Australia’s federal election due by May, the cost-of-living crisis remains a key issue for voters. Polling remains tight, and recent elections have shown that governments need strong policies to address financial pressures if they hope to stay in power.
The financial markets were already biding in an 84 per cent chance of a 0.25 per cent cut ahead of the latest inflation data release, raising expectations for a policy shift in the coming weeks.
The Australian dollar, which usually falls with the interest rates and vice versa, also fell from a little more than 62.5 US cents to 62.3 US cents.