At the end of September, Australia’s inflation rate had dropped to 2.1% year over year for the second quarter of 2023. This decrease brings us to the lowest level since March 2021. The drop from 2.4% last quarter is significant too. It sits in the Reserve Bank of Australia’s (RBA) target inflation band of 2% – 3%. RBA Governor Michelle Bullock anticipated that headline inflation would stay “in the lower half of our 2%–3% target range” for the June quarter.
The recent inflation data is a sign that the economy is cooling and demand is softening. Quarterly inflation fell to 0.7% from 0.9% in the first quarter and slightly below a median forecast of 0.8% in a Reuters poll. This is mainly due to the ongoing effect of temporary cost-of-living relief measures enacted by the federal government, which are now set to be rolled back.
Australia’s economy expanded by an astonishing 4.6% annualized in the first quarter of 2023. GDP (Gross Domestic Product) surged by 1.3% yoy Q1. This expansion was short of the expected 1.5% growth forecasted in a Reuters poll. The quarter-over-quarter GDP boom was slightly disappointing, with 0.2% growth – below the 0.4% growth predicted.
The RBA’s board members have opted to maintain the current interest rate to ensure that inflation continues to fall within the target range. This patient approach provides room for stronger oversight of economic conditions before any changes are made.
For Bank of America, the second-quarter inflation data are likely to be crucial. It is this economic evidence that should lead the RBA to deliver at least a 25 basis point rate cut at its next Board meeting in August. Such a move would be an important additional boost to economic activity at a time when conditions remain dire.
“As that effect unwinds, we expect headline inflation to pick up to around the top of the band at the end of this year and into the first part of 2026.” – Michelle Bullock