What may rate cuts mean for the year ahead? - Feb 2025

The Reserve Bank of Australia cut cash rates this February from the 13-year high of 4.35% to 4.1%, the first decrease in four years. With inflationary pressures stated to be easing "a little more quickly than expected", the RBA has more confidence that inflation is moving sustainability towards Australia’s 2-3% target band.

The cash rate cut was catalysed by the recent easing of headline inflation in 2024 to 2.4%. This was due to the 17.3% fall in net electricity prices and the 6.7% fall in petrol prices (following lower cost of oil commodities). Low levels of household spending due to slow wage growth has contributed to lower demand-push inflation. The appreciation of the AUD on the TWI also helped reduce imported inflation through lower input costs. However, underlying inflation (which excludes one-off and volatile items) rose by 3.2% in 2024 - although this is above the target range, it was less than the 3.4% forecasted by the RBA.

As the major banks passed on this cash rate cut to consumers, the decision swiftly benefited mortgage holders. The 0.25% interest rate reduction means that consumers will owe $110 less a month in repayments on a $600,000 loan, increasing their cash flow and disposable income.

However, a tight labour market suggests the economic outlook remains uncertain. A tight labour market refers to when there are not enough available workers to meet job openings, meaning that cost push inflation via wages may still be a threat. Further, productivity growth remains low, showing that labour costs remain high and making the cash rate decision less clear cut. The Board's highest priority remains sustainably returning inflation to the 2-3% target while ensuring monetary policy remains effective enough to prevent inflation from rising above target. Future decisions will depend on economic data, inflation trends, and labour market conditions.