The latest inflation figures are in, and they're enough to encourage Westpac economists to flip their forecasts for the first Reserve Bank of Australia (RBA) rate cut in years.
Meanwhile, NAB – the only big four bank still predicting the RBA will hold in February – has revealed it's reviewing its forecast in the wake of the findings.
The RBA's preferred underlying inflation rate rose 0.2% in the December quarter and 3.2% over the course of 2024, the Australian Bureau of Statistics revealed on Wednesday.
That's lower than was forecast by most commentators and below the RBA's previous prediction of 3.4% on an annual basis.
"We have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the board will have the required confidence to start the rate-cutting phase in February," Ms Ellis said in response to the data's release.
The RBA began hiking the cash rate in mid-2022 in a bid to tame rampant inflation and has now held it at 4.35% for over 12 months.
A 25 basis point cash rate cut in February, as is now anticipated by Westpac, would likely ease the financial strain for many mortgage-stressed home loan holders.
Following that, the big four bank is forecasting further cuts in May, August, and November, leaving the cash rate at 3.35% by year's end, where it's expected to stay.
The RBA board will come together on 17 February, with its next cash rate decision to be announced on 18 February.
However, the big four bank has still somewhat hedged its bets.
Ms Ellis noted the RBA board might "dig in on their assessment that the demand is still outstripping supply" and hold the cash rate next month.
Westpac the latest big bank to backflip on rate cut predictions
It was mere months ago that Westpac shifted its rate cut call from February to May, then saying the probability of a May cut outweighed that of a February cut.
Westpac's about-face comes just weeks after a similar manoeuvre from ANZ.
ANZ (along with CommBank and NAB) correctly forecast that underlying inflation would fall to 3.2% annually in the final quarter of 2024, and deemed that would be enough to encourage the board to cut the cash rate by 25 basis points.
At the time of writing, NAB is reviewing its prediction of a cash rate hold next month, with its bet still officially on May 2025.
"Our call has been that on balance the RBA would hold fire before cutting in May given there is little urgency to cut and there is option value in waiting to better assess the trajectory of the labour market and the extent of the pickup in growth, before delivering 75 basis points of cuts this year," NAB senior markets economist Taylor Nugent said.
"By April, the RBA would have two more unemployment prints, GDP [for the December quarter], [Wage Price Index for the December quarter], and the February CPI Indicator.
"By May, the RBA would have [March quarter] CPI and an additional two employment prints."
Does falling inflation trump a still-tight labour market?
"The better-than-expected inflation data tilts the balance of probabilities back in February's favour," Ms Ellis said.
"Against that, the labour market has been more resilient than we or the RBA expected."
And therein likely lies the wiggle room that could see the RBA hold the cash rate once more next month.
The labour market remains notably strong, with the unemployment rate still undershooting expectations.
Inflation and unemployment typically move in opposite directions, with weakness in the labour market weighing on consumer spending and therefore prices.
While that hasn't been the case in recent times, Westpac believes the falling inflation rate will be considered more highly than the continuously strong labour market.
Politics of a changing board could drive cut decision
The final nail in Westpac's forecast comes down to the impending RBA board split.
At its February meeting, the board will allow for reforms that will see it separate into two - one to head monetary policy and the other to oversee governance.
"The RBA board has historically set policy according to the demands of its mandate and its assessment of the economy without political considerations," the former RBA assistant governor said.
"This time, though, the forthcoming change of the make-up of the board could create some awkward optics around timing.
"If the current board held rates steady in February and then the revamped board cut rates in April, it would look like the government 'stacked' the board to get the desired result."
"So there is an argument that the current board will opt to get on with it rather than get caught up in the politics of the situation."
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