RBA Signals Possible Rate Cut in 2025
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The Reserve Bank of Australia (RBA) has sent a strong signal that borrowers may experience interest rate cuts in 2025, despite persistent inflation concerns. The RBA’s December meeting minutes, released on December 24, revealed that if inflation continues to fall towards the target range of 2% to 3%, the next move could be a loosening of monetary policy.
The meeting minutes stated, "If this scenario unfolds, members concluded that it would be appropriate to ease the pace of monetary tightening at the appropriate time." This shift in tone marks a sharp contrast to the bank's November statement, where RBA Governor Michele Bullock suggested that further rate hikes were still a possibility. At the time, Bullock had cautioned, "We are closely monitoring the data and do not rule out any possibility. I say this because we still perceive some upside risks to inflation."
The December meeting minutes, however, marked the first indication that the RBA might consider rate cuts, while still expressing concerns over high inflation levels. The minutes emphasized, "In considering the potential implications of these observations on future monetary policy decisions, members reiterated their previous view that there is almost no tolerance for inflation to remain higher for longer than currently anticipated."
Although Australia's headline inflation rate recently dropped to 2.8%, its lowest point in three years, the RBA believes this decline is largely driven by short-term factors, such as a government-subsidized $300 electricity rebate and falling petrol prices. Core inflation, which excludes one-off factors, stood at 3.5% for the year ending September, still above the RBA’s target band of 2% to 3%.
Despite these concerns, the minutes suggested the RBA was somewhat less worried about wages-driven inflation. "Members noted that even with employment levels exceeding full employment standards, wage growth could slow, assuming the labor market moves towards a more balanced state, while inflation expectations remain stable."
As of November, Australia's unemployment rate stood at 3.9%, well below the 5% non-accelerating inflation rate of unemployment (NAIRU) traditionally associated with higher inflation. In tandem, wage growth has slowed from 4.3% at the end of 2023 to 3.5% in September 2024.
The RBA also took note of interest rate cuts in other major economies, such as the United States and the United Kingdom, although Australia has yet to take similar action. However, the minutes suggested that rate cuts abroad may not be as deep as previously anticipated. Last week, the Federal Reserve indicated that its rate cuts in 2025 might be smaller than markets had expected, triggering concerns in financial markets.
The minutes noted, "Despite rate cuts abroad, market pricing and central bank estimates of neutral rates suggest that monetary policy in some economies may be tighter than Australia’s and could remain so into 2025." Currently, the RBA’s cash rate stands at 4.35%, 110 basis points higher than Canada’s policy rate of 3.25%, with Canada having already implemented four rate cuts in 2024. Similarly, New Zealand's cash rate has been reduced to 4.25% after three cuts this year, although this has not prevented the country from entering a technical recession.
In comparison, the RBA's 13 rate hikes in 2022 and 2023 have not led to a technical recession, but the GDP growth rate for the year ending September was just 0.8%, the slowest annual growth since the 1991 recession. The minutes highlighted, "Members pointed out that future trends in consumer spending would have a significant impact on GDP growth and the labor market."
Despite this, Australia’s current cash rate of 4.35% remains slightly below the Federal Reserve's range of 4.25% to 4.5%, and the Bank of England’s rate of 4.75%. Futures markets are pricing in three rate cuts by the RBA in 2025, bringing the cash rate down to 3.6%, a level not seen since May 2023. Westpac, ANZ, and the National Australia Bank predict the first rate cut could occur as early as May, while the Commonwealth Bank expects the RBA’s new monetary policy board to introduce rate cuts in February after the summer recess.
This cautious approach by the RBA is a response to a complex economic environment. Despite an easing of inflationary pressures, the central bank must tread carefully, balancing the need for economic growth against the ongoing risk of inflation. With inflation still hovering above target and global economic conditions shifting, the RBA’s next moves will be closely watched by markets and households alike.
The situation is further complicated by the global economic landscape. The Federal Reserve’s actions, including signals of smaller-than-expected rate cuts, have had a ripple effect on global markets, suggesting that monetary tightening could remain a feature of the economic environment for longer than anticipated. The RBA’s cautious approach may reflect a growing recognition that global inflationary pressures, combined with local economic conditions, necessitate a more nuanced strategy moving forward.
In this context, Australian consumers and businesses will need to remain vigilant. While the prospect of rate cuts in 2025 may provide some relief, the path to achieving stable, sustainable inflation remains fraught with challenges. The RBA’s future policy decisions will play a crucial role in shaping Australia’s economic trajectory, particularly in an era where global inflationary trends and domestic labor market dynamics remain volatile.
Ultimately, the RBA’s handling of interest rates in 2025 will be pivotal in determining how well Australia navigates the post-pandemic economic landscape. The balance between fostering growth and keeping inflation in check will require a careful, data-driven approach, one that reflects both domestic realities and the broader global economic environment. As the year progresses, all eyes will be on the RBA to see if it will indeed take the next step toward easing rates or if it will remain committed to its tightening stance in an effort to control inflation over the long term.
The meeting minutes stated, "If this scenario unfolds, members concluded that it would be appropriate to ease the pace of monetary tightening at the appropriate time." This shift in tone marks a sharp contrast to the bank's November statement, where RBA Governor Michele Bullock suggested that further rate hikes were still a possibility. At the time, Bullock had cautioned, "We are closely monitoring the data and do not rule out any possibility. I say this because we still perceive some upside risks to inflation."
The December meeting minutes, however, marked the first indication that the RBA might consider rate cuts, while still expressing concerns over high inflation levels. The minutes emphasized, "In considering the potential implications of these observations on future monetary policy decisions, members reiterated their previous view that there is almost no tolerance for inflation to remain higher for longer than currently anticipated."
Although Australia's headline inflation rate recently dropped to 2.8%, its lowest point in three years, the RBA believes this decline is largely driven by short-term factors, such as a government-subsidized $300 electricity rebate and falling petrol prices. Core inflation, which excludes one-off factors, stood at 3.5% for the year ending September, still above the RBA’s target band of 2% to 3%.
Despite these concerns, the minutes suggested the RBA was somewhat less worried about wages-driven inflation. "Members noted that even with employment levels exceeding full employment standards, wage growth could slow, assuming the labor market moves towards a more balanced state, while inflation expectations remain stable."
As of November, Australia's unemployment rate stood at 3.9%, well below the 5% non-accelerating inflation rate of unemployment (NAIRU) traditionally associated with higher inflation. In tandem, wage growth has slowed from 4.3% at the end of 2023 to 3.5% in September 2024.
The RBA also took note of interest rate cuts in other major economies, such as the United States and the United Kingdom, although Australia has yet to take similar action. However, the minutes suggested that rate cuts abroad may not be as deep as previously anticipated. Last week, the Federal Reserve indicated that its rate cuts in 2025 might be smaller than markets had expected, triggering concerns in financial markets.
The minutes noted, "Despite rate cuts abroad, market pricing and central bank estimates of neutral rates suggest that monetary policy in some economies may be tighter than Australia’s and could remain so into 2025." Currently, the RBA’s cash rate stands at 4.35%, 110 basis points higher than Canada’s policy rate of 3.25%, with Canada having already implemented four rate cuts in 2024. Similarly, New Zealand's cash rate has been reduced to 4.25% after three cuts this year, although this has not prevented the country from entering a technical recession.
In comparison, the RBA's 13 rate hikes in 2022 and 2023 have not led to a technical recession, but the GDP growth rate for the year ending September was just 0.8%, the slowest annual growth since the 1991 recession. The minutes highlighted, "Members pointed out that future trends in consumer spending would have a significant impact on GDP growth and the labor market."
Despite this, Australia’s current cash rate of 4.35% remains slightly below the Federal Reserve's range of 4.25% to 4.5%, and the Bank of England’s rate of 4.75%. Futures markets are pricing in three rate cuts by the RBA in 2025, bringing the cash rate down to 3.6%, a level not seen since May 2023. Westpac, ANZ, and the National Australia Bank predict the first rate cut could occur as early as May, while the Commonwealth Bank expects the RBA’s new monetary policy board to introduce rate cuts in February after the summer recess.
This cautious approach by the RBA is a response to a complex economic environment. Despite an easing of inflationary pressures, the central bank must tread carefully, balancing the need for economic growth against the ongoing risk of inflation. With inflation still hovering above target and global economic conditions shifting, the RBA’s next moves will be closely watched by markets and households alike.
The situation is further complicated by the global economic landscape. The Federal Reserve’s actions, including signals of smaller-than-expected rate cuts, have had a ripple effect on global markets, suggesting that monetary tightening could remain a feature of the economic environment for longer than anticipated. The RBA’s cautious approach may reflect a growing recognition that global inflationary pressures, combined with local economic conditions, necessitate a more nuanced strategy moving forward.
In this context, Australian consumers and businesses will need to remain vigilant. While the prospect of rate cuts in 2025 may provide some relief, the path to achieving stable, sustainable inflation remains fraught with challenges. The RBA’s future policy decisions will play a crucial role in shaping Australia’s economic trajectory, particularly in an era where global inflationary trends and domestic labor market dynamics remain volatile.
Ultimately, the RBA’s handling of interest rates in 2025 will be pivotal in determining how well Australia navigates the post-pandemic economic landscape. The balance between fostering growth and keeping inflation in check will require a careful, data-driven approach, one that reflects both domestic realities and the broader global economic environment. As the year progresses, all eyes will be on the RBA to see if it will indeed take the next step toward easing rates or if it will remain committed to its tightening stance in an effort to control inflation over the long term.