Inflation lands in RBA's target range for first time in four years

The measure of inflation most carefully watched by the Reserve Bank of Australia has fallen within the central bank’s preferred range for the first time in four years.

Trimmed mean annual inflation fell to 2.9 per cent from 3.3 per cent during the previous quarter, marking the first time that trimmed mean annual inflation has fallen with the RBA’s 2-3 per cent target band since December 2021.

Trimmed mean, or underlying, inflation is weighted towards the average cost of the middle 70 per cent of items.

The headline annual inflation rate to the March 2025 quarter of 2.4 per cent was unchanged from the December 2024 quarter. The March quarter increase of 0.9 per cent follows two quarters in a row of 0.2 per cent rises. 

The inflation data from the Australian Bureau of Statistics (ABS) released Wednesday (30 April) offers more encouragement for the RBA to cut the official cash rate at its next meeting on 20 May.

Economists at CBA, ANZ and Westpac expect a 25 basis point rate cut in May, which would bring the cash interest rate down to 3.85 per cent.

With the federal election just days away, it was no surprise that Federal Treasurer Jim Chalmers was keen to point to easing inflation as a tick of approval for his government.

“Under Labor inflation is low,” the Treasurer told reporters in Canberra.

“Real wages are growing, unemployment is low, we’ve got the debt down, growth is rebounding solidly in our economy and interest rates have started to come down as well.

“So this is a powerful demonstration of the progress Australians have made together under Labor on inflation and on the economy more broadly as well.

“The market has a very firm view that there are more interest rate cuts on the way, and I don’t see anything in these numbers that would substantially alter their expectations,” Mr Chalmers said.

The RBA held the official cash rate at 4.10 per cent in April and has not ruled a rate cut in or out, citing global economic uncertainty as the main factor putting rate cuts at risk.

Housing costs remain a major contributor to inflation.

The pace of average rental cost hikes continues to ease but was still up 5.5 per cent on a year earlier. It climbed 6.4 per cent in the year to December and were rising by nearly 8 per cent this time in 2024.

Leigh Merrington, ABS acting Head of Prices Statistics, said the quarterly growth in housing inflation was largely driven by electricity (+16.3 per cent) in one state.

“The rise was driven by increases in electricity prices in Brisbane where most households have used up the $1,000 Queensland State Government electricity rebate, resulting in higher out of pocket electricity costs. 

“Some households in the remaining states and territories also saw rises in electricity bills this quarter.

“This comes as the impact from the Commonwealth Energy Bill Relief Fund (EBRF) rebates was lower in the March quarter compared to the December quarter due to the timing of rebate payments.”

The case for and against a rate cut

Real Estate Institute of Australia President, Ms Leanne Pilkington, said the figures support market expectations of an interest rate cut when the RBA meets in May, followed by further rate cuts during 2025.

“We now have all the broad measures of inflation in the RBA’s target range and the third consecutive quarter that the headline rate has been in the range.

“There was also a welcome outcome for services inflation that has proven to be sticky.

“It is now the lowest since June 2022, easing to 3.7 per cent in the March quarter, down from 4.3 per cent in the December quarter.

“Together with election commitments by the two major parties to improve access to home ownership for first home buyers, this points to a more optimistic outlook for home buyers,” Ms Pilkington said.

If there is an argument from the RBA that rates need to be kept on hold for another month, it is that the quarter-on-quarter CPI jump to 0.9 per cent exceeded market expectations of a 0.8 per cent increase.

Annually, Australia’s CPI inflation did steady at 2.4 per cent in Q1 versus 2.4 per cent prior but that too was above the market consensus of 2.2 per cent.

But the weight of opinion still pointed to a rate cut in a few weeks.

Tony Sycamore, Market Analyst, IG, said downside risks to global growth and a softer near-term inflation profile meant the RBA was likely to focus on the downside risks to growth and cut interest rates by 25 basis points in May.

Pradeep Philip, Head of Deloitte Access Economics, pointed to the RBA’s focus on international economic issues.

“A May rate cut should not be viewed as the RBA declaring ‘mission accomplished’ in the fight against inflation.

“Instead, it should be viewed as insurance against any collateral damage a trade war and geopolitical turbulence may cause the Australian economy.”

Double rate cut prospects

While May looks set for the next cash rate cut, questions remain over just how deep the cut will be.

Bendigo Bank’s Chief Economist David Robertson said that unlike the US, which faces stagflation due to its tariffs, Australia’s inflation outlook appears much more benign than previously forecast.

“The next cut is almost certain for 20 May, but of what magnitude?” Mr Robertson asked.

“We have four more cuts, including May, in our forecasts taking the rate down to around 3.1 per cent, a drop of 25 basis points per quarter.

“Meanwhile, the markets are now factoring in five rate cuts to around a 2.8 per cent level by year end, which is a deeper path than previously expected.”

The RBA can ease rates quickly if global conditions suddenly worsen, Mr Robertson noted, but this is an unlikely course of action for the moment.

“A larger 50 basis point cut in May is most unlikely unless markets become dislocated like in the GFC, which isn’t currently visible, but a 35 basis point cut from the RBA in May would round out the cash rate to more convenient fractions.”