February rate cut still a possibility, says AMP

AMP chief economist Shane Oliver said the December quarter inflation data released tomorrow (Wednesday) will be key in determining whether the RBA cuts rates in February.

Oliver said CPI indicators and falls in final product price increases in business surveys suggest that both headline inflation and trimmed mean inflation rate may have slowed for the December quarter figures.

"We expect headline inflation to slow to 0.2 per cent quarter on quarter or 2.4 per cent year on year, down from 2.8 per cent year on year in the September quarter thanks to various government 'cost of living' measures including electricity rebates, lower public transport costs and caps on childcare fees along with lower new dwelling costs, slowing rent growth, flat household equipment and services prices and seasonal softness in clothing prices," he said.

Given the focus on cost of living measures, Oliver said the RBA's focus would be on trimmed mean inflation.

The bank expects this to slow to 0.5 per cent quarter on quarter or 3.2 per cent year on year, down from 3.5 per cent year on year.

"This would mean an annualised trimmed mean inflation rate of 2 per cent over the quarter and 2.5 per cent over the last six months," Oliver said.

"As it would be 0.2 per cent below the RBA’s forecasts it would imply a downwards revision to its inflation forecasts for much of this year and 12 month ended trimmed mean inflation being back in the target range earlier than its current forecasts indicate."

If the trimmed mean inflation rate does cool in line with AMP's expectations, Oliver said it would be "very hard for the RBA not to cut rates at its February meeting".

Conversely, Judo Bank economists and chief economic advisers, Matthew De Pasquale and Warren Hogan believe a rate cut in February is highly unlikely.

“Our interpretation of the data available is that the economy remains on solid footing and that there is no clear urgency to enter a cutting cycle,” De Pasquale and Hogan said.

The bank said the latest employment figures, EBA wage data from the Fair Work Commission for late 2024 and a rise in job vacancies suggest the RBA should be cautious with monetary easing.

“We expect the RBA to hold off on cutting, waiting for more data in 2025 to confirm that inflation is on a sustainable downward trajectory outside of government subsidy impacts and that resilience in the labour market and potential wage growth isn’t a genuine risk," De Pasquale and Hogan said.

While Hogan and De Pasquale said there is still the possibility of a cut next month considering current political and social pressure, they expect the RBA will keep the cash rate on hold until more economic data emerges.