Interest rate cuts become inevitable as inflation cools

It’s no longer a matter of if, but when. Interest rate cuts are on the horizon, and the RBA is getting what it wanted - a moderation in growth and a pause to spiralling inflation. Things are under control, but if they won’t monitor closely, they could be left sleeping at the wheel.

Over the past year, I’ve been building a view and sharing with you that inflation will moderate. It’s come after very steep interest rate hikes. But the moderation in inflation is finally here. The trimmed mean is tracking to fall below 4% on an annualised basis, and the headline CPI figure is at 3.4%, slightly above the 2-3% target band range.

The only problem areas for inflation are housing and financial products, such as insurance. But these are both made more expensive with rising rates. Insurance premiums become cheaper when rates fall. So too does property, building and overall housing supply.

Meanwhile, retail spending bounced last month but much less than expected at 1.1%. The consumer continues to reign in their spending while paying off debt or higher rents.

My big focus on the next few weeks will be the other hidden risks to the Australian economy, such as the slowdown in commodity prices and a weaker than expected China. That too could bring interest rate cuts sooner than expected.

Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.