On January 29, 2025, the Reserve Bank of Australia (RBA) is on the brink of making significant changes to its monetary policy, with expectations mounting for interest rate cuts at the upcoming meeting due to falling inflation and increasing economic pressure on households.
The latest consumer price index (CPI) data for December revealed a meager inflation rate of just 0.2 percent for the quarter, culminating in a modest annual increase of 2.4 percent. The trimmed mean measure, which is viewed as a more stable inflation indicator, also dropped to its lowest level since 2021, falling to just 2.0 percent annualized. This surprisingly low inflation has led financial markets to price in more than 90 percent likelihood of interest rate cuts by the RBA at its February board meeting.
ACOSS CEO Dr. Cassandra Goldie emphasized the urgency for the RBA to act, stating, "With inflation consistently falling and firmly in the target band, it’s hard to justify leaving rates this high." Goldie noted the dramatic increase in financial stress among low and middle-income Australians due to previous rate hikes, which have made it significantly harder to afford everyday essentials.
The overarching message from economists is clear: the RBA’s decision to raise interest rates was made without full awareness of the potential consequences, and delaying rate cuts could exacerbate economic woes. The latest trends have placed the RBA's cash rate under scrutiny, with many expecting at least three 25-basis-point cuts throughout 2025, with some analysts predicting up to 100 basis points of cuts by early 2026.
According to AMP’s deputy chief economist Diana Mousina, the market forecasts align with her analysis, expecting the cash rate to stabilize at 3.6 percent by the end of 2025. Mousina noted the favorable inflation figures allow the RBA to feel more secure about shifting rates downward sustainably, highlighting how the trimmed mean inflation rate fell to 2.7 percent on a six-month annualized basis.
Gareth Aird, the chief economist at CBA, also predicts four 25 basis point cuts over the course of 2025, leaving the cash rate at 3.35 percent by year's end. He acknowledged the risks, noting the economic impact of external factors such as governmental fiscal policy leading up to the federal elections slated for May 17.
With low unemployment observed, many analysts see this as a chance to boost economic activity rather than viewing it as an economic hindrance. There is cautious optimism surrounding the easing of borrowing costs. Investors believe this may also boost housing prices, consumer spending, and overall business confidence, according to Jun Bei Liu, who works at Ten Cap.
While economic forecasts are inherently uncertain, the prevailing sentiment suggests significant moves from the RBA are not only on the horizon but are urgently needed to mitigate the challenges faced by many Australian households. The discussions around interest rate adjustments underline the interconnectedness of macroeconomic indicators and the direct effects on individual finances.
Notably, mortgage holders can expect considerable savings if the RBA follows through on cuts; for example, each 25 basis point cut is predicted to save those with $500,000 mortgages around $96 monthly. Multiple cuts could substantially alleviate the financial burden on borrowers.
The time for decisive action appears to be upon the RBA. Opponents of delayed rate cuts warn of potential damage to job growth and general economic stability. Dr. Goldie's remarks reflect growing concerns about the weakening purchasing power of Australians as economic growth stagnates. Addressing unmet societal needs through increases in income support, limiting rent increases, and reducing out-of-pocket healthcare costs, she contended, should be among the RBA's responsibilities along with its monetary policy.
Overall, the RBA stands at a crossroads as it prepares for its February meeting. With inflation data now supporting potential cuts, the question circulating among economists, policymakers, and borrowers remains: just how far and how quickly will these cuts occur? Time will tell if inflation continues to ebb downward, granting much-needed relief to those grappling with the weight of rising costs and elevated interest rates.