RBA says February rate cut not guaranteed even if inflation figures rosy

The Reserve Bank could hold off on a February rate cut even if underlying inflation is lower than it expects, a move that would reverberate among mortgaged households and could undermine the federal government's electoral fortunes.

Minutes from the Bank's November board meeting suggest the board wants to see two successive quarters of low inflation in the coming months before cutting rates from 4.35 per cent, where they have remained for a year.

"Scenarios in which inflation declined materially more quickly than currently forecast … could warrant an easing in the cash rate target," the minutes read.

"But [the board] would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable."

RBA governor Michele Bullock has nominated the board's mid-February meeting as the earliest likely date for a rate cut.

Some observers have taken that to mean that the December quarter inflation figures, which will land in late January just weeks before that meeting, will be decisive.

This in turn could be decisive for the timing of the federal election, if it opened the way for a late-January call to hold a mid-March poll with a rate cut during the campaign.

But the minutes suggest a rate cut is not assured even if December inflation is low using the Reserve Bank's favoured "underlying" measure, which excludes volatile items.

Rental slowdown or energy bill relief could deliver low inflation

The board identified two reasons why inflation might be lower in December than it expects: "emerging signs" that the rental market is cooling quicker than expected, and the flow-on effects of the government's $300 household energy bill relief.

Energy bill relief has already lowered the headline inflation figure, which fell to 2.8 per cent in the September quarter. That effect is temporary, and Ms Bullock has said she will disregard it and focus on underlying inflation, which remained high at 3.5 per cent.

But the Treasury has argued the energy bill relief could also lower underlying inflation, if the lower headline result conditions people to expect lower prices and adjust their behaviour accordingly.

The RBA's forecasts do not predict this will happen, but the minutes hose down expectations that a rate cut will follow if it does.

Spending and jobs figures are also factors

The minutes suggest the case for a February rate cut could be enhanced if household spending or the jobs market are unexpectedly weak.

These figures could carry greater weight than the inflation figure itself, which is published after the fact, because they point to what might happen to inflation in future.

According to the minutes, board members agreed it was "important to remain forward looking, avoiding an excessive reliance on backward-looking information".

But the board did not see a compelling case for a cut on either front. While the minutes noted households did not appear to be lifting their spending in the wake of tax cuts or energy relief, there were signs that their incomes and confidence were improving.

And while board members acknowledged that the strong labour market could take a turn for the worse if it turned out companies had been "hoarding labour", they saw little evidence of this beyond the anecdotal.

This led to agreement among the members that rates should stay where they were, and that they should convey that they were more alert to the risk of inflation being too high than the chance of it being surprisingly low.

Chalmers quietly confident

The pessimistic outlook for rate cuts comes as Treasurer Jim Chalmers prepares to deliver a speech on the state of the economy in parliament on Wednesday, when he will strike a note of optimism.

Mr Chalmers will point to "encouraging" signs Australians are feeling better about the future, after the ANZ Roy Morgan consumer confidence survey hit a near-two-year high this week.

"The progress we've made since July 2022 is clear. Inflation has more than halved, underlying inflation is falling too, real wages are growing again, the economy is still expanding [and] a million new jobs have been created," he is expected to say.

"We're not pretending it's mission accomplished — it isn't. We are realistic about this … [But] very cautious confidence and emerging optimism is welcome and warranted."

The opposition will be given an opportunity to respond to the statement.

Opposition Leader Peter Dutton on Tuesday blamed the government for the financial strain faced by households.

"People can't pay their mortgages, people can't pay their insurance … The working poor under this government are lining up for food packages because two partners in a relationship working can't pay the bills," he said.

Mr Dutton sees voter anger about the economy as key to his election prospects and will seek to pin that anger on government policies and migration, hoping to replicate the recent success of politicians around the world in displacing incumbent governments, including Donald Trump in the US.

US voter anger persisted despite real wage growth, falling inflation and low unemployment, an outcome Mr Chalmers s remarks will allude to in a tempering of his optimism.

"Even with substantial progress in the aggregate numbers, we know that doesn't always translate to how people are faring and feeling day to day," he will say.