Interest rates: ABS inflation data ‘pours at least a bit of cold water’ on hopes of second cut

Fresh inflation data has poured “at least a bit of cold water” on hopes of a second successive cash rate cut.

The Australian Bureau of Statistics’ January numbers show the Reserve Bank of Australia’s preferred measure of underlying inflation — the trimmed mean — increased to 2.8 per cent from 2.7 per cent in December.

While there is more information to come before the RBA board meets on March 31, Canstar data insights director Sally Tindall said it has given the central bank “reason to hold the cash rate firm at 4.10 per cent”.

“Core inflation is now heading in the wrong direction, according to the ABS monthly dataset. While this is not cause for panic, it pours at least a bit of cold water on the prospect of further cash rate cuts in the near future,” Tindall said.

“While there is plenty more data to come between now and the next board meeting, the central bank is poised to put the handbrake on the cash rate when it next meets.

“This brake could be applied until the second half of this year if inflation data throws up further spanners.”

Most Australians with a variable home loan will begin seeing their interest rate go down on Friday, following last week’s cash rate cut.

But mortgage holders have been told to check that their bank adjusts their direct debits down to match the new minimum amount, if that is what they want to do.

Some banks will only make the switch if you ask.

“If you can bunker down and keep paying the higher amount, you could potentially save tens of thousands of dollars and pay off your debt months, if not years, early,” Tindall said.

“If you’re a variable borrower, pick up the phone to your lender and ask them what they intend to do with your repayments.

“While you’re on the phone why not ask for a further discount on your rate. Don’t wait for the RBA to serve you one up.”

Meanwhile, headline inflation held steady at 2.5 per cent in the 12 months to January 2025.

The largest contributors to annual price growth were food and non-alcoholic beverages (+3.3 per cent), housing (+2.1 per cent), and alcohol and tobacco (+6.4 per cent), according to the ABS.

Treasurer Jim Chalmers said both headline and underlying inflation are within the RBA’s target band and that the figures were a reminder of Australia’s “substantial and sustained progress in the fight against inflation”.

“This is the first time in almost four years that headline inflation has been below three per cent for six consecutive months,” he said in a joint statement with Finance Minister Katy Gallagher.

A hawkish RBA governor Michele Bullock has said the battle against inflation was not yet won and more progress in the data was needed before they could be convinced to cut further.

EY senior economist Paula Gadsby said the inflation data supported the RBA’s decision to cut the cash rate to 4.1 per cent, but caution was needed as the first monthly CPI read of the quarter has more goods and fewer services.

“This can underestimate the rise in prices when goods are adding less to inflation than services, which is currently the case,” she said.

- With AAP