Reserve Bank of Australia Poised for Rate Cuts in 2025 Amid Easing Inflation

On November 5, 2024, the Reserve Bank of Australia (RBA) decided to keep the cash rate steady at 4.35%, signaling that rate cuts could be a possibility in early 2025. Although Australia’s easing cycle is lagging behind other advanced economies due to persistently high domestic inflation, recent data suggests a gradual cooling, which may allow the RBA to consider a shift toward more accommodative policy.

According to The Australian Financial Review’s latest quarterly survey, most economists expect the cash rate to be reduced to 4.1% at the RBA’s first meeting of 2025, with rates predicted to fall further to 3.35% as policy gradually loosens. This potential change could provide relief for households, especially mortgage holders, who have been managing high borrowing costs since inflation reached its peak.

AMP economist Diana Mousina and Challenger’s Jonathan Kearns, a former senior RBA economist, expect even lower rates by 2026, projecting a drop to 2.5%. “While domestic inflation pressures are easing, the pace remains slow, and we don’t expect the conditions for a rate cut to align before the new year,” stated National Australia Bank Chief Economist Alan Oster, who recently revised his forecast to predict a February 2025 rate cut.

Mousina highlighted the RBA’s focus on balancing price stability with full employment in an economy highly sensitive to interest rate changes. “A sharper decline in the labor market could have led to an increase in home loan arrears and forced sales,” she noted. “Other economies are seeing faster rises in unemployment, but Australia’s approach to rate adjustments has managed to preserve jobs, which supports the RBA’s cautious strategy.”

Most forecasters expect Australia’s easing cycle to trail the U.S. Federal Reserve’s, which began reducing its rates last month to a target range of 4.75% to 5%. Similarly, the Reserve Bank of New Zealand is anticipated to cut rates again from its current level of 5.25%. Analysts believe Australia’s rate reductions could follow about six months later, due to a lower peak in the RBA’s cash rate and the delayed inflationary cycle.

The past two years have seen economists debate when the RBA might begin cutting rates, with projections pushed back as inflation remained persistently high. After 13 consecutive rate hikes and a period of stability, economists now largely agree that a rate cut is likely in the first quarter of 2025.

ANZ, Westpac, and NAB forecast a February cut, while CBA has a more optimistic outlook, suggesting a cut could come sooner. Gareth Aird, CBA’s Head of Australian Economics, stated that the RBA might begin its easing cycle ahead of reaching full employment. “The decision on Melbourne Cup Day shows the RBA may act quickly if inflation declines faster than expected,” he said.

Optimism about cooling inflation is shared by forecasters like Katrina Ell at Moody’s and independent economist Stephen Koukoulas, who both predict core inflation could slow to 2.8% by year-end—lower than the RBA’s current forecast of 3.5%. While the Australian economy is experiencing limited growth, high borrowing costs and persistent inflationary pressures continue to weigh on households. However, government electricity rebates and tax cuts introduced on July 1, which provide the average wage earner with an additional $1,500 annually, are expected to offer some relief and potentially boost consumer spending.

Approximately two-thirds of economists surveyed by The Australian Financial Review anticipate a rate cut by February, while a third warn that factors like a strong labor market, population growth, and a buoyant stock market could delay the RBA’s timeline for easing. These dynamics, along with a slow but steady decline in inflation, may push back the timeline for rate relief.

Recent data from the Australian Bureau of Statistics’ Consumer Price Index (CPI), released on October 30 and covering the September 2024 period, showed inflation trending lower, reinforcing expectations for a rate cut by February. With more data expected before the next meeting in early 2025, attention will be focused on the RBA’s next steps and how they may impact the broader economic landscape.