Inflation data pushes rate cut to top of to-do list for RBA in February

Key takeaways

While the latest inflation data (CPI) could be enough for the RBA to cut the cash rate next month, the big four banks are still split on the timing

Trimmed mean inflation is 2 tenths below the RBA’s dated November forecast

Westpac brings forward its forecast of the timing of first cash rate cut to February

While today’s latest inflation data (CPI) could be enough for the RBA to cut the cash rate next month, the big four banks are still split on the timing.

The ABS December quarter CPI data recorded headline inflation at an annual rate of 2.4%, down from 2.8% in the previous quarter, however, this was in part driven by the state and federal governments’ temporary electricity subsidies.

Importantly, trimmed mean inflation, which is the RBA’s preferred measure, as it reduces the effect of irregular or temporary price changes, dropped from an annual rate of 3.6% in the September quarter to 3.2% – just above the RBA’s target band.

Trimmed mean inflation is now at the lowest annual rate since December 2021, and well below the recent peak of 6.8% at the end of 2022, according to the ABS.

Headline inflation came in lower than expected with an increase in the December quarter of 2024 of just 0.2%.

Following these better inflation result the money market is now pricing in an 92% probability of an interest rate cut when the Board next meets on the 18^th of February.

Westpac and NAB bring forward timing of first cash rate cut

All four big bank economic teams now expect the first cash rate cut will come at the next RBA Board meeting, which finishes on 18 February.

The number of cuts to be delivered by the RBA is still hotly contested.

ANZ expects the RBA will make just two cash rate cuts in the cycle, while NAB is predicting a total of five. However, NAB has brought forward the timing of these forecasted cuts, with the last cut expected to land in the first quarter of next year (previously it was Q2 2026).

What would a rate cut look like for borrowers?

An owner-occupier with a $600,000 debt today, and 25 years remaining on their loan could see their monthly repayments drop by $92 on the back of just one 0.25 percentage point RBA cut, assuming the banks pass it on in full to existing variable rate borrowers.

However, the RBA is not expected to stop at just one rate cut.

While there is much conjecture around the number of cuts we’ll see, a total of four cuts in 2025 could see the same borrower’s repayments drop by a total of $359 per month by the end of the year.

Canstar.com.au Data insights director, Sally Tindall says,

“Today’s inflation results are a step in the right direction and will be well received by the Reserve Bank.”

“While there are still some sticking points in the data, particularly around insurances, rents and education, it’s fantastic to see inflation for things like non-discretionary items fall to 1.8 per cent.

“This really helps to take the pressure off family budgets across the country.

“This inflation result puts consideration of a rate cut at the very top of the RBA’s agenda when it next meets on the 17^th and 18^th of February.

“The RBA knows how tough it’s been for borrowers with a mortgage and also renters under the pressure of the current cash rate.

“While annual core inflation might not yet be in the RBA’s target band, it should be close enough to warrant action.

“A rate cut in February has the potential to inject almost $100 a month back into the budget of someone with a $600,000 mortgage with what should be at least one more rate cut waiting in the wings.

“While the RBA meeting is just under three weeks away, borrowers don’t need to sit and wait for our central bank to make a decision; pick up the phone today and haggle with your bank for a rate cut.

“Of course, there’s no guarantee the RBA will move next month, services inflation could still be keeping the Board up at night, enough to keep the cash rate in its current holding pattern for another couple of months. So if you’ve got a mortgage don’t bank on rate relief until it hits your bank account.”

About Aska Soo Aska is a passionate and driven professional with many years of experience as a property consultant helping clients achieve their financial goals through property acquisition. She has consulted clients around Australia by reviewing, educating, and advising clients about their financial situation and what they need to achieve their end goal of being financially free.