February rate cut on the table, but not a done deal - Quantiphy
 

February rate cut on the table, but not a done deal

January 30, 2025

The latest inflation figures have thrown a curveball before a pivotal RBA meeting in February.

With the Consumer Price Index (CPI) data coming in lower than expected—annual underlying inflation now sitting at 3.2%—speculation is rife that the RBA might move to cut interest rates as soon as next month. But while the door is open, it’s not yet a done deal.

Why a Rate Cut is on the Table

Inflation has been on a steady decline from its peak of around 8% in December 2022, and the latest figures indicate disinflation is happening faster than the RBA initially anticipated. The combination of government subsidies on energy and rent, alongside a cooling economy, has contributed to the softer CPI reading.

Bond markets have already priced in a rate cut with over a 90% probability by February, seeing a total of two cuts before mid-year as a near certainty. Economic analysts suggest the RBA may take this opportunity to ease financial conditions and support economic activity, particularly as consumer spending and business investment remain tepid.

The Case for Holding Steady

Despite the clear disinflationary trend, the RBA might not be in a rush to cut rates just yet. Historically, the bank has preferred two consecutive quarterly inflation readings before adjusting monetary policy. Governor Michele Bullock has also indicated that more than just one strong inflation print would be needed before committing to a rate cut.

The labour market remains resilient, with unemployment at just 4%. This is well below the RBA’s previous estimate of the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which it had pegged at 4.5%. While job vacancies have slightly increased, wage growth has moderated, which could indicate the economy is adjusting without requiring immediate intervention.

A Political and Economic Balancing Act

The timing of any rate cut carries political weight. With a federal election due by May, the RBA’s decision in February could determine whether there are zero, one, or two cuts before voters head to the polls. Cutting in February makes another reduction in April likely, potentially influencing the economic narrative heading into the election.

Additionally, the RBA board itself is undergoing a transition. February marks the last meeting of the current board, with two new members set to join in March. There’s a possibility that the RBA may delay any major policy shift to give the incoming board a clean slate to make its own assessments.

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What This Means for Borrowers and Investors

For mortgage holders and investors, the prospect of rate cuts offers a glimmer of relief after the aggressive tightening cycle of the past two years. Lower interest rates would ease mortgage repayments and potentially reinvigorate property demand. However, for those reliant on savings, a rate cut could mean lower returns on deposits.

The Verdict? A Coin Toss

The February meeting is shaping up to be a genuine 50-50 call. The RBA could seize the opportunity to pre-empt further economic weakness and move early, or it could take a more cautious approach and wait for additional data before pulling the trigger. Either way, rate cuts in 2025 seem inevitable—the question is simply when they begin.

Stay tuned, because this decision could have significant implications for Australia’s economic trajectory in the months ahead.

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