It's possible millions of mortgage borrowers will not need to hand over hundreds of dollars to their bank over the course of this year. ( ABC News: John Gunn )
You know the feeling. Something just isn't sitting right.
There's uncertainty around what the Reserve Bank of Australia will do with monetary policy in 2025. That uncertainty was heightened on Tuesday when the RBA made the decision to cut interest rates but then immediately hosed down any suggestion of following it up with another interest rate cut.
"The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range," the Reserve Bank Board said in the statement following the decision.
"In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook."
There's a crucial phrase above that could anger millions of mortgage borrowers: "… inflation would settle above the midpoint of the target range."
Sorry, who said anything about hitting the "midpoint of the target range"?
The RBA has consistently said it was aiming to see underlying inflation "sustainable" within the target range of between 2 and 3 per cent.
Does needing to hit the bullseye of 2.5 per cent mean interest rates will be higher for longer?
Former RBA official speaks out
Former Reserve Bank assistant governor Luci Ellis has some thoughts on the matter. She noted that new Reserve Bank forecasts have inflation hitting 2.7 per cent in 2026. You could argue that's towards the top end of the RBA's target inflation band.
"It seems that, in the new world, 2.7 per cent is not good enough: policy must be set to show 2.5 per cent at the end of the forecast period," Ellis wrote in a note.
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"It also explains why in the post-meeting press conference, the Governor emphasised that people still needed to be patient to get inflation down — down by a whole 0.2 percentage points." This would suggest that the RBA needs to see more evidence of disinflation (a reduction in price increase) to be confident of cutting interest rates again.
But why stop there? Let's get more confusing.
Deputy governor Andrew Hauser was interviewed by Bloomberg on Thursday.
He seemed more optimistic than his boss that inflation was on track to fall further.
"The key piece of new information revealed in that interview was that the Board reviewed a scenario of unchanged cash rates that had inflation undershooting the midpoint of the target, 'not by a lot, but by a little bit'," Ellis had said.
"Assume this means 2.3 per cent. Contrast that with the published forecasts with (trimmed mean) inflation settling at 2.7 per cent," he said.
To be clear, on Tuesday the governor said the bank wasn't confident of cutting interest rates further due to uncertainty around the bank hitting its inflation bullseye — something no one was aware the central banks wanted to do.
Then her deputy says if interest rates stay where they are, the bank could overshoot that bullseye.
"If the RBA has revised up its estimate of the sensitivity of inflation to interest rates in recent times, this has not been widely signalled," Ellis said.Â
"But, even with this greater sensitivity, what we are seeing is an RBA trying to finesse a scenario where inflation lands at exactly 2.5 per cent instead of 2.7 per cent.
"This is the epitome of fine-tuning — something monetary policymakers are supposed to avoid."Â
Inflation may be on track to hit target band
It's all the more bizarre when you consider the possibility that underlying inflation is indeed on track to fall to the RBA's target band on time.
Investment bank JP Morgan has crunched the numbers. I want to quote something the bank wrote in a public statement this week, but brace yourself, it's complex.
"… when inflation was low and stable before the pandemic, an increase in overall inflation was associated with a rise in idiosyncratic inflation," economist Jack Stinson wrote.
"The sign on this relationship has flipped post-2020. If underlying inflation has stabilised around the target, then we might expect idiosyncratic inflation to co-vary positively with aggregate inflation again (and explain a larger fraction of its variance).
"Resumption of this relationship would thus provide evidence that the dynamics of underlying inflation are consistent with the a low and stable inflation regime."Â
To put it as simply as I can, the RBA is currently working on annual inflation data that includes price increase from 2024.
If you annualise current inflation data, you find inflation is now within the Reserve Bank's target band. JP Morgan agrees with that and says, crucially, it's now sustainably there too.
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RBA free to cut interest rates further, data suggests
That frees up the Reserve Bank to cut interest rates at its next meeting in April.
Better yet, for mortgage borrowers, is that, if Commonwealth Bank estimates are correct, the cash rate could dive by over a percentage point over the next 12 months.
"The RBA noted in its February 2025 Statement on Monetary Policy that there has been a downward shift in some of its modelled estimates of the nominal neutral cash rate in Australia," the CBA noted.
The "neutral cash rate" is an RBA monetary policy setting that neither stimulates or restricts demand in the economy.
In theory the Reserve Bank could cut the cash rate to this neutral level if underlying inflation fell, and sat, within its target band of between 2 and 3 per cent.
"We calculate that the average of the RBA's seven models that estimate the nominal neutral cash rate put the current nominal neutral cash rate at ~2.9 per cent," the CBA said.
"Such an outcome is materially below the RBA's previous point estimate of the nominal neutral cash rate of ~3.5 per cent.
"The downward assessment of the neutral cash rate more closely aligns to our thinking on where the neutral cash rate sits.
"The RBA Board should feel more confident to ease policy through 2025 based on its reassessment that the neutral cash rate is lower than it previously assumed."
See the phrasing there? "Should feel" more confident.
Once bitten, twice shy
But mistakes have been made in the past.
Former governor Philip Lowe was hammered by the media and commentators for suggesting in the pandemic that interest rates would not increase until 2024. That 'mistake' effectively ended the practice of forward guidance for the bank.
Even yesterday the Reserve Bank governor was apologising for not responding to the post-pandemic inflation surge as she fronted a federal parliamentary committee.
Behind Michele Bullock's clever balancing act
Photo shows A woman with short brown hair and glasses with a neutral expression.
"What's also playing on the board's mind is that the board also doesn't want to be late, and arguably we were late raising interest rates on the way up," Michele Bullock said.
"We didn't respond as quickly as we should have to rising inflation."
As for clarifying her comments on Tuesday?
Bullock said some of the December quarter inflation data was a "downward surprise", and while the RBA can "explain away some of it", it can't explain it all.
Collectively, she said the December quarter inflation gave the board more confidence — but not "complete confidence" — that inflation is coming down to be closer to the RBA's target band.
Some economists believe the Reserve Bank can cut the cash rate again in April, but will wait until May so it can lean on (hopefully) encouraging ABS first quarter inflation data.
It's entirely possible millions of mortgage borrowers will not need to hand over hundreds of dollars to their bank over the course of this year and next which, of course, runs into the thousands of dollars over several years.