Does Australia’s oldest bank think the central bank will cut rates this month?
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Last week was a big one for homeowners with the Australian Bureau of Statistics releasing the latest inflation numbers.
The national statistical agency revealed that underlying inflation was 0.5% for the December quarter. This means that the yearly trimmed mean inflation rate fell to 3.2%, down from 3.5% in the September quarter.
Headline inflation rose by 0.2% during the quarter and 2.4% for the 12 months through to 31 December.
This has sparked hopes that the Reserve Bank of Australia (RBA) will be able to cut interest rates at its meeting in February.
But is this the case? Let’s dig deeper into things.
Will the RBA cut interest rates in February?
Let’s start with the RBA Rate Indicator. It shows the market’s expectations for a change in the official cash rate set by the RBA.
The indicator calculates a percentage probability of an RBA interest rate change based on the price of ASX 30 Day Interbank Cash Rate Futures.
The good news for borrowers is that cash rate futures are indicating that there is a 95% probability of a decrease to 4.1% at the 18 February meeting.
The even better news is that the economics team at Westpac Banking Corp (ASX: WBC) agrees with the cash rate futures. According to its latest Westpac Weekly economic report, the bank has pulled forward its rate cut expectations from May to February.
Commenting on last week’s economic data and interest rates, Westpac’s chief economist, Luci Ellis, said:
Normally it should not come down to one number. This round, however, the CPI has been the deciding factor because the message from other available data has been so mixed. With trimmed mean inflation at 0.5% in the quarter (3.2%yr), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the Board will have the required confidence to start the rate-cutting phase in February.
What’s next for interest rates?
Ellis believes that February’s interest rate cut will be the first of four in 2025. She is forecasting further cuts in May, August, and November, bringing the cash rate down to 3.35%. Ellis concludes:
Looking beyond the next meeting, we see the RBA as remaining data-dependent from here and not in a hurry to move further. Conditional on further declines in inflation and some softening in the labour market, we see cuts in May, August and November, taking the terminal rate to 3.35%. This is in effect a reversion to our earlier call, now that it has become clearer that the economy is evolving broadly in line with our forecasts, and not the more hawkish view of domestic cost growth that would have led to further delays.
All in all, it looks like relief could be on the horizon for homeowners.
Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
