‘Slayed the dragon’: CBA says Australia has beaten inflation, tips more rate cuts

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‘Slayed the dragon’: CBA says Australia has beaten inflation, tips more rate cuts

Australia’s biggest bank believes the battle against inflation has been won, tipping mortgage holders to get back-to-back rate cuts.

Despite national inflation figures coming in hotter than expected and a surge in Aussies employed in April, a Commonwealth Bank economist is “confident” the RBA will cut interest rates in May before leaving the “door ajar” for a second rate cut in July.

Camera IconStruggling mortgage holders could get back-to-back rate cuts. NewsWire / Nicholas Eagar Credit: NewsWire

“We expected the RBA to commence normalising the cash rate in February with a 25bp rate cut, which was delivered, and we also forecast another 25bp rate decrease in May,” CBA head of *********** economics Gareth Aird said in an economic note.

“Recall that the RBA left the cash rate on hold in April, and a rate cut was not explicitly discussed. But it is an understatement to say that a lot has happened since the April board meeting.”

CBA’s rate cut call is largely in line with most experts and the money markets forecast, which is pricing in about a 95 per cent chance of a 25 basis point cut in May.

If Mr Aird is right in his prediction, the *********** cash rate would fall from 4.10 to 3.85 per cent.

Australia’s Cash Rate 2022

The RBA will next meet on May 19-20 when it is widely predicted to cut rates by at least 25 basis points before meeting every six weeks throughout 2025.

Even though the RBA will likely leave the “door ajar” for back-to-back rate cuts when the central bank meets again in July, CBA says its base case is cuts in May, August and November.

“The CBA call for an end-of-year cash rate of 3.35 per cent is also unchanged,” Mr Aird said.

CBA’s call to normalise rates comes as the bank believes Australia has beaten inflation, even with 89,000 Australians finding a job and stronger-than-expected wage growth data coming out in April.

Both are usually a sign of inflation due to more Australians having money to spend in the economy chasing a similar amount of goods.

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“Our view is that the proverbial inflation dragon has been slayed,” Mr Aird said.

“But we are not convinced the RBA will share that view just yet given the unemployment rate is still below the RBA’s estimate of the NAIRU (non‑accelerating inflation rate of unemployment).”

Treasurer Jim Chalmers said throughout the week that the strong wage and employment data was in line with Australia’s soft landing, which is a slowing down of economic activity without causing a recession.

“Real wages reflect the progress we’ve made together on wages but also the progress we’ve made together on inflation,” Mr Chalmers said.

“We’ve got wages growing and we’ve got inflation falling and those are really the key elements of this soft landing that we have been engineering in our economy at a time of really substantial global economic uncertainty.”

CBA agreed, saying the “soft landing has been achieved”.

“And this will mean the RBA can continue to normalise the cash rate as we move through 2025 to a level it considers to be a more neutral setting,” Mr Aird said.

“The Reserve Bank of Australia will look past the strength in employment, wages data and cut rates when they meet on May 20.”

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