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Market prices in February rate cut
The RBA has marked a shift in tone, dropping its usual phrase about “ruling anything in or out” to signal an evolving approach as fresh data shapes its decisions.
Reserve Bank governor Michele Bullock said on Tuesday the board is increasingly confident that inflation will ease gradually next year, after the central bank held rates at 4.35 per cent for the ninth consecutive month.
While the fight against inflation continues, Bullock conveyed cautious optimism for 2025 during the post-meeting press conference.
She explained that the board deliberately dropped the phrase “ruling anything in or out” to signal reduced concern about upside risks to the inflation outlook.
“The board wanted to give the message that they have noticed some of the data that has been softer … than we expected. And so, the board wanted to convey that their opinions and their views are evolving,” Bullock said.
“We’re not saying what we might do, but we are acknowledging that there is some softening, and our forecasts do see inflation coming back down, gradually over the next year.”
Despite this shift in tone, which is more dovish than last month, Bullock confirmed that no rate cuts were considered at the meeting.
“We did not explicitly consider an interest rate cut,” she said, and ruled out providing forward guidance on when the central bank might lower interest rates, emphasising instead the need for more comprehensive economic data.
Addressing geopolitical uncertainty mentioned also in the RBA’s post-meeting statement, Bullock highlighted concerns such as trade tensions and conflicts, emphasising their potential impact on global supply chains.
“For the moment, the best we can do is focus on what we have on in our domestic economy, and that’s inflation … and if there are shocks, we’ll have to react at the time,” she said.
Despite the RBA’s steady stance, the money market adjusted its expectations on Tuesday, now pricing in a 65 per cent chance of a rate cut in February, with nearly two cuts anticipated by May.
Economists divided
Economists were unsurprised by the RBA’s decision to hold rates on Tuesday, noting that elevated inflation and strong employment figures leave little room for the central bank to accelerate its rate cut timeline. However, as in previous months, economists remain divided on the timing of the first rate cut.
“The reality is that the Australian economy is proving to be stubbornly resilient,” said VanEck’s head of investments and capital markets, Russel Chesler.
“While we are starting to see some glimmers of the property market cooling down … we continue to have a robust labour market, low unemployment and persistent wage inflation. Consumer spending has also picked up, and we anticipate further inflationary pressures in the near term.”
Chesler noted that while the market is widely anticipating the first rate cut in May, it has consistently failed to “accurately predict this over the past year”.
“Provided the labour market remains strong and there are no exogenous shocks in the interim, we maintain our long-held position that our first rate cut will be later in 2025 and that Australia will experience a soft landing,” Chesler said.
Conversely, the CBA upheld its forecast for a February rate cut, highlighting that the accompanying statement clearly signalled a shift towards a more dovish stance.
CBA’s Gareth Aird stated that Tuesday’s board statement suggests the board is now confident that the next move in interest rates will be a cut.
“Our base case is for the RBA to commence normalising the cash rate in February 2025 with a 25 bp interest rate cut,” the head of CBA’s Australian economics said.
“We look for 100 bp of easing over 2025 that would take the cash rate to 3.35 per cent. This is a touch below the RBA’s estimate of the nominal neutral cash rate, which is centred on a point estimate of 3.5 per cent.”
AMP’s Shane Oliver similarly said the RBA’s commentary has clearly shifted to a more dovish tone, signalling the possibility of upcoming rate cuts.
While the chief economist doesn’t expect the RBA to wait for inflation to reach the target range before cutting rates, he said it is awaiting more confidence that this outcome is likely.
“Our assessment remains that the RBA should be cutting rates sooner rather than later,” Oliver said.
“For now, we will leave our base case for the first cut being in May – which we revised from February two weeks ago. However, we think the RBA will be flexible and will look at forward-looking indicators so there is high chance of a February cut.”
The chance of a February cut, Oliver said, stands at around 50 per cent, contingent on December quarter trimmed mean inflation coming in at 0.6 per cent quarter-on-quarter or lower, weak forward-looking indicators and softer jobs data, as expected.
The RBA’s next rate announcement is scheduled for 18 February and is expected to be its last in the current format, as the two-board system is set to take effect from March.
AUTHOR
Maja Garaca Djurdjevic
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