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Mortgage-holders will be about $8000 better off on average if a slowdown in inflation paves the way for the Reserve Bank of Australia to cut rates as expected.
Data to be released by the Australian Bureau of Statistics on Wednesday is widely tipped to show core inflation for the December quarter was substantially lower than the RBA’s forecasts.
With underlying inflation moving sustainably back to target and Australia’s economy growing at its slowest rate since the 1990s – outside the pandemic – the door should be opened to an interest rate cut in February, Deloitte Access Economics Partner Stephen Smith said.
On the other hand, tightness in the labour market, elevated government spending and a falling Australian dollar were militating against a cut.
But Mr Smith still expects 75 basis points of cuts in 2025 followed by a further 75 basis points in 2026.
“By the end of the rate-cutting cycle, a household with an average-sized mortgage and a variable mortgage rate would be around $8000 better off in today’s dollars,” he said.
Helping bring down the inflation rate was a material reduction in construction cost rises, which weigh especially heavily on the consumer price index.
New dwelling costs climbed at their lowest rate in the year to November at just 2.8 per cent, after being stuck around 5 per cent for the previous year and a half.
The ABS said the fall was mainly because of builders offering discounts and promotional offers to entice business.
The unexpected drop in that component shaved 10 basis points off Commonwealth Bank’s inflation forecasts for the quarter, CBA economist Stephen Wu said.
Treasurer Jim Chalmers boasted his government’s role in bringing down inflation from the levels it inherited from the previous coalition government, arguing the Deloitte report showed a soft landing was increasingly likely.
“Inflation is down, wages are up, unemployment is low, we’ve overseen the creation of more than 1.1 million jobs and as a result Deloitte expects growth in Australia to pick up this year,” Dr Chalmers said.
Deloitte predicted real GDP growth to accelerate from 1 per cent in 2024 to 1.6 per cent in 2025 and 2.3 per cent the year after.
But it was a far-from stellar report card.
Australia’s “middling productivity performance” was cause for alarm, dwelling construction remained in the doldrums and business investment has faded since the pandemic.
The government had plenty of work to do to turn around the dire medium-term outlook, starting with substantive, productivity-enhancing tax reform.
“Significant structural challenges weigh on Australia’s economic outlook,” he said.
“A lack of comprehensive economic reform, geopolitical risks, an uninspired policy discourse, and the unaffordability of decent housing suggests there is an opportunity to do better.”
Despite real wages ticking up, Australians aren’t likely to recover their pre-pandemic purchasing power until 2030, Deloitte predicted.
Opposition Leader Peter Dutton blamed “wasteful” government spending for keeping inflation and interest rates higher for longer.
“It’s been bad enough for Australians over the last two-and-a-half years,” he told reporters.
“Another three years of Labor … would wreck the economy.”
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