Early Interest Rate Cut Anticipated by Major Australian Banks
In a significant shift in expectations regarding monetary policy, Australia’s ANZ Bank has joined the Commonwealth Bank in forecasting an earlier-than-expected interest rate cut from the Reserve Bank of Australia (RBA). Originally, the ANZ anticipated that the RBA would make any downward move on interest rates in May 2025. However, recent inflation data has prompted the bank to revise its prediction to February 18, 2025—the RBA’s first board meeting of the year.
The Context: Inflation Data and Predictions
This renewed forecast from the ANZ came on the heels of the consumer price index (CPI) figures released on November 2024, which indicated a decline in trimmed mean inflation from 3.5% in October to 3.2% in November. Although this rate still exceeds the official RBA target of 2% to 3%, the downward trend in inflation augurs well for potential monetary easing.
The RBA’s trimmed mean inflation measurement is particularly important because it removes more volatile elements such as fluctuations in fuel and electricity prices, presenting a clearer picture of the economy’s overall health. Adam Boyton, head of Australian economics at ANZ, noted that the current inflation response was significant enough for the RBA to consider a 25 basis point cut, shifting the timeline for such an action forward to February instead of May.
Expectations for the Year Ahead
While the sentiment regarding a February rate cut is optimistic, the banks maintain a cautious perspective regarding future cuts. ANZ anticipates no more than two rate cuts for the year, emphasizing that the RBA is likely to proceed slowly in its approach to monetary easing. Commonwealth Bank economist Harry Ottley echoed this view, predicting that if inflation continues to trend downwards, a 25 basis point cut could happen in February, potentially leading to a total of 100 basis points of easing through 2025.
AMP’s deputy chief economist, Diana Mousina, forecasts a trimmed mean inflation rate for the December quarter to be slightly lower than the RBA’s expectations. Should her predictions hold true, it would further consolidate the case for a rate cut at the beginning of the year.
NAB’s senior economist, Taylor Nugent, also weighed in, highlighting that inflation was gradually approaching the RBA’s desired target range, thus keeping the possibility of a February rate cut open. The markets support these expectations as well, with probability assessments rising from a 66% chance of a February cut prior to the data release to a now firmed-in 75%.
Impact on Borrowers
The implications of a potential rate cut for mortgage holders are significant. For instance, a $500,000 mortgage could see a decrease of $76 in monthly repayments should the RBA proceed with a 25 basis point cut. In another scenario, a household with a $600,000 loan could save approximately $92 per month. These reductions could provide substantial relief for many borrowers struggling with rising costs.
However, it is important to note that despite the optimism surrounding a possible cut in February, overall headline inflation—which includes essentials such as food and energy—has only slightly increased by 2.3% over the past year, a rise from 2.1% in October. Notably, the increases in annual inflation figures can be partly attributed to changes in government subsidies and rebates, particularly in electricity prices.
Conclusion: A Cautious Optimism
As Australia heads into 2025, the consensus among major economic players indicates a potential shift in interest rates, contingent upon forthcoming inflation data. With the RBA facing mounting pressure to support mortgage holders amidst rising costs, both ANZ and Commonwealth Bank align with a hopeful yet cautious outlook on monetary policy easing. The upcoming board meeting in February will be closely watched as markets and borrowers alike await the Reserve Bank’s decision on whether to cut rates and, in doing so, provide critical relief in an ever-challenging economic landscape.
