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    • Will the RBA finally cut interest rates?
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    Will the RBA finally cut interest rates?

    Online Niel Posted on

    As Australians struggled with the cost of living and cut back on essentials under the pressure of rising interest rates, they were hammered with a key message.
    For the past few years, the Reserve Bank of Australia (RBA) has emphasized that in order to cut interest rates, inflation must be in the 2 to 3 percent range.
    Last week, that happened.
    marking the first time in three and a half years that it has been below 3 percent.
    So does that mean the RBA will go ahead with a rate cut as soon as Tuesday after the monthly board meeting?

    It is highly unlikely. Here’s why.

    Inflation is up to the target range, so why not cut the rate?

    Sally Tindall, director of data at financial comparison website Canstar, said the rate of inflation is not what it seems.
    “This number is largely based on smoke and mirrors created by temporary electricity cuts and volatile gas prices,” she said in a statement.

    “Any hope of a cash rate cut in 2024 is now effectively dead in the water.”

    The RBA’s preferred measure of inflation is ‘average inflation’ – which is the core inflation rate that reduces the effect of irregular or temporary changes in prices that can affect the consumer price index – in this case electricity and car fuel.

    Stripping out these factors, along with other big price rises and falls, annual average inflation was 3.5 per cent, down from 4.0 per cent in the June quarter, according to the Australian Bureau of Statistics.

    When is the first rate cut expected?

    And that figure is still too far from striking distance for the RBA to change tack, Tindall said.
    Economists at Australia’s “big four” banks – Commonwealth, Westpac, NAB and ANZ – predict the RBA could cut rates by 0.25 percentage point in February 2025.
    It also forecasts a total of four cuts by the end of 2025.

    However, markets don’t price in a first cut until April 2025.

    Chart showing how interest rates have risen in Australia.

    A chart showing how interest rates have risen in Australia. Source: SBS News

    My Bui, economist at AMP, forecasts three rate cuts next year.

    “(Core) inflation won’t get into the target band until the middle of the third quarter… So, barring a recession, (the RBA) probably won’t rush to cut rates sharply.”

    Additional reporting from Reuters.

    Online Niel
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