It may be 12 months later than experts and economists initially expected, but the Reserve Bank of Australia (RBA) Board has finally seen enough to begin easing its tight fiscal policy, which has kept rates at a 13-year high for the past 18 months.
Former Governor Philip Lowe’s words from 2021 are still leaving a stain on the Reserve Bank when he stated that rates would “stay low until at least 2024”—before aggressively raising them 12 times over 13 months.
Lowe’s exit, at the end of his tenure in mid-2023, brought former Deputy Governor Michele Bullock to the top, ushering in a new level of transparency about the RBA’s discussions. This shift was partly due to Bullock’s clear communication, as well as new media roll calls an hour after each cash rate announcement, allowing journalists to ask questions—something that might have been helpful during Lowe’s time.
Nonetheless, Bullock has consistently emphasized that the Reserve Bank will closely follow data, and it is the data that will guide their decisions.
Now that the RBA has acted, experts and economists—who, it’s important to note, update their forecasts at their discretion—have weighed in again. Initially, they expected rates to begin coming down in early 2024. As always, we aim to provide a clear view of what the RBA is saying, the available economic data, and what those in power at the big banks are communicating.
The RBA statement that accompanies the cash rate announcement was the most revised it has been in years, and it got straight to the point—in a positive way.
“Underlying inflation is moderating,” the headline read, replacing the previous statement: “Underlying inflation remains too high.”
The RBA explained, “In the December quarter, underlying inflation was 3.2%, which suggests inflationary pressures are easing a little more quickly than expected.”
They added that, with continued subdued growth in private demand and easing wage pressures, the Board is now more confident that inflation is moving sustainably toward the midpoint of the 2–3% target range.
However, the statement also cautioned that if monetary policy is eased too much too soon, disinflation could stall, causing inflation to settle above the target range’s midpoint.
“In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook,” the statement concluded, emphasizing that the Board “will continue to rely upon the data and the evolving assessment of risks to guide its decisions.”
Bullock addressed the media an hour after the cash rate announcement, beginning with a monologue before taking questions.
She stated that higher interest rates have clearly been effective as expected, by restricting economic activity and putting downward pressure on inflation.
“The board judges it is time to reduce a little bit of that restrictiveness, but we cannot declare victory on inflation just yet. It is not good enough for inflation to be back in the target range temporarily; the board needs to be confident that it is returning to the target range sustainably.”
Bullock explained that as inflation begins to ease, one of the key issues the RBA is grappling with is how the labor market is responding, and whether the tight labor market could hinder disinflation (a reduction in the rate of inflation).
She acknowledged that the decision to cut rates was a difficult one, with arguments on both sides, suggesting the Board had an active debate. Ultimately, she said, “the better decision was to ease some of the restrictiveness in recognition we are making progress towards our goal.”
When asked what the Board would need to see in order to deliver a second rate cut, Bullock said that the Board would need to see continued easing in wage growth, further disinflation in market services, and ongoing reductions in housing inflation.
She also highlighted the uncertainty between demand and supply, adding, “It would be really good to see some recovery from the supply side of the economy.”
The end of January marked a key signal to both the RBA and the markets that rate cuts were on the horizon.
The quarterly inflation for the December quarter came in at 3.2 per cent, down from 3.5 per cent, hitting its lowest point in three years. The annual Headline CPI dropped to 2.4 per cent, down from 2.8 per cent in the previous quarterly reading. It's worth noting that Headline CPI includes government-rebated electricity bills.
The monthly CPI will be released at the end of February, followed by another update at the end of March, just days before the RBA’s next cash rate announcement on April 1.
In February’s Finder RBA Cash Rate Survey™, nearly three-quarters of the experts and economists predicted a cash rate cut. Of the 37 surveyed, 64% expect another rate cut in May.
Dr. Andrew Wilson from My Housing Market noted that although the preferred measure of inflation is clearly moving toward the RBA’s target range, risks remain.
“Services inflation remains too high, the labour market remains strong with upward pressure on wages due to worker shortages, and the US has indicated a steady outlook for rates following recent falls as inflation rises again. The likely widespread imposition of tariffs by the US and retaliation by trading partners risks higher inflation. Surely, given these circumstances, it is prudent for the RBA to continue in pause mode at least over the shorter term.”
AMP Chief Economist Shane Oliver also called for a rate cut.
“Underlying inflation is falling faster than the RBA expected and has been running around the target over the last six months. Economic activity is a bit weaker than expected, and Trump’s trade war poses more risks to Australian growth than inflation.”
CoreLogic Research Director Tim Lawless cautioned against expecting a rapid or significant rate-cutting cycle in the near term.
“The RBA is likely to remain alert to the data flows, with persistently tight labour markets, a weak Australian dollar, and elevated levels of global uncertainty remaining as downside factors that are likely to keep the loosening cycle gradual and cautious.”
The Big Four banks ultimately agreed that February would be the month the RBA would first cut rates. At the time of the December meeting, three out of the four banks had expected the first cut to occur in May.
Westpac’s economic spokesperson Luci Ellis, a former RBA employee, noted that after the February cut, the RBA still assessed policy as being restrictive.
“It recognised the progress made on getting inflation to target. It also acknowledged that upside risks to inflation had eased and that ‘there are signs that disinflation might be occurring a little more quickly than earlier expected.’”
ANZ Senior Economist Adelaide Timbrell described the bank’s reading of the Monetary Policy Decision Statement as “hawkish,” a view reinforced by Governor Bullock’s comments during the press conference.
The Board highlighted the risk that “if monetary policy is eased too much too soon, disinflation could stall,” and added that it remains “cautious about the outlook.”
We no longer need to question if rates will come down, but rather how far they will fall. So, let's take a closer look at where the banks expect the cash rate to go in 2025 and 2026.
Both CBA and Westpac are forecasting four rate cuts throughout 2025, which would reduce the cash rate to 3.35 per cent by year-end.
Despite changing its cash rate forecast from May to February, ANZ has kept its expectations for the number of cuts unchanged.
“We haven’t altered our view on the number of cuts in this cycle,” said ANZ Australia Senior Economist Catherine Birch. “We still anticipate two 25-basis point cuts: one in February, followed by an extended pause until the next in August 2025.”
Meanwhile, NAB expects five rate cuts, albeit more gradual ones. They now predict that by February 2026, the cash rate will have dropped to 3.1 per cent, a revision from their earlier forecast of achieving this rate by June 2026.
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