Promising outlook for those struggling to cover costs at Christmas

In a promising outlook for millions struggling to cover costs as the Christmas holiday season looms, in the minutes of the Reserve Bank of Australia's last board meeting for the year the central bank appears more comfortable with where the economy is headed.

In particular, it noted that the risks of not doing enough to fight inflation were balanced by the risks of doing too much.

Markets and several economists think interest rates are as high as they need to go and will begin to come down at some point in 2024. Investors currently put a May rate cut as a better than even chance.

The more optimistic prospect for borrowers comes at the end of the year in which the official cash rate was pushed up five times to 12-year high of 4.35 per cent, in the process causing the share of household disposable income going on mortgage repayments to reach an all-time high of 10 per cent.

The RBA acknowledged the "painful squeeze" many were experiencing and said a recent fall in extra payments into mortgage offset and redraw accounts was consistent with the pressure being felt from high interest rates and living costs.

The central bank said recent growth data and its own business liaison program showed that demand was subdued and competition among retailers was intensifying - both hopeful developments in trying to ease prices.

But the Reserve Bank has stopped well short of declaring victory over inflation and remains alert for evidence that inflation pressures are not easing as quickly as it considers necessary.

It is expected to pay close attention to the consumer price index reading for the December quarter, which comes out on January 31, five days before the next interest rate setting meeting.

The central bank has been wary that domestically-driven price pressures, particularly those affecting services, could prove to be more stubborn than those for internationally traded goods, which have been coming down quickly.

It has also been concerned that recent strong wage gains could, by increasing business costs, cause prices to go up faster.

But recent developments on both counts seem to have tempered some of the RBA's fears.

At its December 5 meeting, the RBA board noted that the pace at which prices were easing in some other countries had accelerated in recent months and, "if emulated in Australia, this would be helpful in bringing inflation back to target".

And although the wage price index had its biggest ever quarterly gain in the three months to September, driven to a large extent by a large boost to the minimum wage, the central bank said "spillovers" from this to workers not an award "did not appear larger than usual".

Wages, it said, were unlikely to rise much faster - a point underscored by its admission that unemployment could rise higher than its currently anticipates.

Against this, the central bank expects rising rents will be an "ongoing source of inflationary pressure for some time".

Commonwealth Bank head of Australian economics, Gareth Aird, said the December quarter inflation data would "make or break" the case for any further rate hike.

Mr Aird thought a concerning surge in inflation was unlikely.

While conceding that a February 2024 rate rise was a possibility, he said, "the need for further rate rises has dissipated. We expect an easing cycle commencing in September". Mr Aird tips the cash rate to fall to 2.85 per cent by mid-2025.

ANZ head of Australian economics Adam Boyton also thinks rates have peaked but expects any cuts will be delayed until November next year.

Mr Boyton said the stage three tax cuts that come into effect from July 1 next year, plus the likelihood of more government cost of living assistance, will do some of the central bank's work for it in easing financial conditions, giving the RBA time to hold its monetary policy steady until late 2024.