RBA cuts rates for first time in more than four years

But in a blow to hopes of more interest rate cuts, the bank believes underlying inflation will remain at 2.7 per cent for the next 18 months.

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Headline inflation is still forecast to hit the mid-point of the bank’s 2 to 3 per cent target band by mid-2025 but then jump to 3.7 per cent by year’s end as government subsidies in areas such as energy and public transport come to an end.

A key factor in the slowdown in inflation is the housing sector.

Even excluding the federal government’s boost to Commonwealth Rent Assistance, the RBA said rent inflation is moderating as landlords struggled to find tenants willing to pay high rents. There has also been an increase in the number of people either staying with their parents or moving in to share houses.

“The recent easing in advertised rents inflation is consistent with softening demand for housing through an increase in average household size (possibly due to affordability constraints) and slowing population growth,” it said.

“Housing price growth was weak in the December quarter and has moderated by more than expected.”

Builders are reporting some spare capacity after dwelling cost inflation peaked around 20 per cent in mid-2022.

But the bank noted that “construction costs remain too high relative to selling prices”.

The RBA has cut its forecasts for overall economic growth, tipping GDP to have expanded by just 1.1 per cent through 2024. It had tipped growth of 1.5 per cent.

For the 2024-25 financial year, it has cut its forecast for growth to 2 per cent from 2.3 per cent.

The growth is lower despite the bank now expecting the public sector – which includes energy subsidies – to grow faster. Public demand is tipped to grow by 5.3 per cent this financial year after the bank had been expecting it to lift by 4.4 per cent.

The rise in spending is due to the release by all governments of their mid-year budget updates which showed a lift in expenditure in most administrations. At the federal level, some of the extra spending is on defence-related imports.

Private investment is tipped to improve as businesses spend more on digitisation and renewable energy projects.

Despite downgrading growth expectations in the near term, the RBA believes growth will be a little higher through the second half of this year and into 2026. By the end of next year, it expects GDP growth of 2.3 per cent.

The bank said this lift in growth would keep upward pressure on underlying inflation.

“This reflects our assessment that the pick-up in GDP growth will flow through to tighter labour market conditions than we previously expected and will sustain some upward pressure on inflation,” it said.

The jobs market continues to surprise the bank, noting that it appears to have tightened over recent months.

Unemployment through the December quarter has been revised down to 4 per cent from 4.3 per cent. The bank has for the past year been expecting the jobless rate to rise to 4.5 per cent, but it is now forecasting it to peak at 4.2 per cent by the end of next year.

The bank admitted the outlook for the jobs market was difficult to decipher.

“Some labour market indicators suggest the unemployment rate may actually decline a little further in the near term, whereas the labour market may ease more than forecast if the expected recovery in private demand does not materialise,” it said.

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Job figures for January will be released later this week, with economists tipping a slight increase to 4.1 per cent.

A key element to the bank’s forecast is an expectation that labour productivity has deteriorated. It is forecasting productivity to have declined by 1.9 per cent through 2024, afte previously tipping a 1 per cent drop.