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Oz Inflation Could Dip Below 3%, Though Interest Rate Cuts Unlikely

Inflation rates in Australia are set to cool within the Reserve Bank’s 2-3 per cent target range as early as this July, with May’s budget promising to ease the cost-of-living-crisis within the country.

One of the measures that is expected to have a direct and immediate effect on lowering inflation is the energy rebates promised by the Albanese Labor Government. Accordingly, from July 1, 2024, all households will see a A$300 credit automatically applied to their electricity bills and around one million small businesses will receive A$325 off their bills over 2024–25. The credits will be applied in quarterly instalments. The government is providing A$3.5 billion for this relief, which extends and expands the energy bill relief rolled out to households and small businesses in 2023-24.

Based on estimates of 2024-25 standing offers, the energy bill relief means that nationally household bills will be 17 per cent lower on average compared to the previous year. This comes on the back of the Albanese Government’s Energy Bill Relief Fund announced in December 2022, which also committed up to A$1.5 billion in energy bill relief.

Jim Chalmers, the government’s Minister for Climate Change and Energy, said that compared to the government’s 2022 Energy Bill Relief Fund, the latest power bill relief doubles the number of eligible households from five million to more than 10 million.

“As the Australian Bureau of Statistics has shown, our energy bill rebates have directly reduced inflation. In the year to the March quarter 2024, electricity prices rose two per cent, and would have risen 14.9 per cent without our energy bill rebates,” said Chalmers in a media statement.

As the government tackles inflation and pushes it downwards, it’s a signal to the Reserve Bank to lower interest rates ahead of next year’s elections.

Chalmers noted in a separate statement on Monday, “We are making welcome and encouraging progress in the fight against inflation, but we know there is more work to do because inflation is still too high and people are under pressure. That’s why this month’s budget had such a big focus on providing responsible cost-of-living relief that directly reduces inflation.”

Economists have suggested that the extra energy subsidies announced in recent federal and state budgets would at their peak in July and August leave household power bills nearly 30 per cent lower than they would be otherwise, which would in turn slash as much as 0.6 percentage points from measured consumer price growth in those months. Encouragingly, they claim that Australians on average would still be paying 15 per cent less for electricity by the middle of next year.

Monthly inflation figures due today are expected to show price growth in the year to April steady at 3.5 per cent, implying therefore that the energy subsidies might do the trick of forcing inflation down below the 3 per cent mark imminently.

The RBA isn’t expected to be convinced by the monthly figures though to convince it that interest rate cuts are warranted and will instead likely rely on more comprehensive quarterly CPI figures to dictate their course of action.

In May, ahead of the federal budget announcement, the RBA Board met and decided to maintain the interest rate at 4.35 per cent – a figure that won’t be revised at least until the Board’s next meeting in mid-June.

At the time, the Board noted in a statement, “The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out. The Board will rely upon the data and the evolving assessment of risks. In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.”

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