Treasurer's stark warning over expected August interest rate cut

The Australian

4 days ago

Jim Chalmers has urged caution over banking on an August rate cut following Wednesday's release of 'outstanding' inflation figures which has stoked market confidence the RBA will reduce the official cash rate in August.
The ABS quarterly update to the Consumer Price Index revealed the Reserve Bank of Australia's preferred inflation measure, the trimmed mean, came in at 2.7 per cent for the 12 months until June.
This was also the second time the trimmed mean, which takes out volatile measures like fuel, and short-term government rebates, was in the RBA's target 2 to 3 per cent band.
While the figures have stoked hopes for a rate cut at the RBA August 11-12 meeting, the Treasurer reminded homeowners that it surprisingly kept rates on hold in July despite widespread expectations of a 25 basis point cut.
Instead the RBA governor Michele Bullock announced the monetary policy board members chose 6-3 to keep the rate on hold at 3.85 per cent.
'The market had a very firm expectation the last time the Reserve Bank board met, and what that told us is that market expectations don't always accord with the decisions taken independently by the Reserve Bank board,' Mr Chalmers told Sky News.
'I think that's an important reminder as we see that the market once again has got very firm expectations about the next meeting.
'There's very good reasons why our Reserve Bank is independent (and) good reasons why Treasurers like me don't predict or pre-empt the decisions that they take independently around that boardroom table in Sydney.'
Treasurer Jim Chalmers welcomed falling inflation but urged against hopes of a near-certain rate cut in August. Picture: NewsWire / Martin Ollman
Overall he welcomed the positive inflation figures, and said Australia was outperforming peer countries such as the US, the UK, Canada and New Zealand, where inflation was on the rise.
'These are outstanding numbers in the context of the recent history of inflation in this country – much higher and rising when we came to office; much lower and falling now,' he said.
Shadow treasurer Ted O'Brien said he hoped the CPI data would 'offer hope to struggling Australian mortgage holders'.
'A rate cut would be welcome relief to the average Australian mortgage holder who is currently paying an additional $1900 in interest every month compared to when Labor came to office,' he said.
'Interest rates have been too high for too long in Australia as a direct consequence of Labor's homegrown inflation, fuelled by an increase in government spending from 24 per cent to 27 per cent of GDP, the highest level outside of recession since 1986.'
Shadow Treasurer Ted O'Brien said Wednesday's figures would be 'welcome relief' for mortgage holders. Picture: NewsWire/ Martin Ollman
With inflation falling to its lowest level in years, Bendigo Bank chief economist David Robertson suggested the RBA monetary policy board should make a larger move on interest rates.
'(Wednesday's inflation reading) should assure an RBA rate cut in August, and potentially opens the door for a larger cut than the normal 25 basis points,' he said
'While a 50 basis points cash rate cut in August seems unlikely in light of (RBA governor) Michele Bullock's speech last week around consistency, a 35 basis points cut to the cash rate would take it down to 3.5 per cent – which would be a sensible compromise.'
According to Betashares chief economist David Bassanese, who was one of the few economists to correctly predict a rate hold in July, said Wednesday's CPI reading was 'good enough' for a rate cut in August.
'Although this is a touch higher than the Reserve Bank's May forecast of 2.6 per cent – my view is near enough is good enough and an August rate cut now seems a done deal,' he said.
'Underlying inflation is inching closer to the middle of the RBA's 2 to 3 per cent target band and so justifies a further easing in what are – in the RBA's own words – a still 'modestly restrictive' level of interest rates.'