WEEKLY E-MAIL

3 February 2025

2025 INTEREST RATE OUTLOOK

By Amelia Paullo

On Wednesday, the 29th of January, the Australian Bureau of Statistics (ABS) released the latest Consumer Price Index (CPI) data for the December quarter of 2024, which was better than expected, indicating that the soft landing Australia has been preparing for is looking more and more likely.

The data revealed that CPI rose by a marginal 0.2% in the quarter, bringing the annual headline inflation rate down to 2.4% from 2.8% in the September quarter. This latest headline CPI figure came in below market expectations, which were for a 0.3% rise. This is the second quarter now that annualised headline inflation has been within the RBA’s target band of 2-3%.

Underlying inflation (designed to reduce the impact of irregular or temporary price changes) also dropped from 3.6 per cent in September to 3.2 per cent in December – its lowest rate in three years, although not yet within the RBA’s target band of 2-3%.

The ABS credited the drop in headline inflation to lower electricity prices, falling fuel prices and moderating price rises for new dwellings, and government relief measures have aided the fall in electricity prices.

Source: Australian Bureau of Statistics

The reduction in inflation has many market participants now expecting the RBA to cut interest rates at their February meeting. ANZ Bank now expects two 25 basis point cuts during 2025, in February and August. CBA, on the other hand, thinks there will be four interest rate cuts in 2025 of 25 basis points per quarter.

Some lenders, such as Macquarie Bank, have already started reducing fixed-rate mortgage costs in preparation for future rate cuts.

NAB economists, however, have argued that a February rate cut may be premature as the deceleration in inflation has largely been due to government interventions such as Commonwealth Rent Assistance (the maximum increased by 10% in the September quarter) and energy rebates.

Factors that may delay expected rate cuts include a small fall in the unemployment rate to 4% from 4.25% and a deteriorating government deficit expected to widen from 2.3% to 5.3% this financial year.

Overseas, US President Trump has told the World Economic Forum in Davos, Switzerland, that he will demand that the US Federal Reserve drop interest rates immediately. He seeks to lower interest rates by unleashing energy production through more drilling for oil and gas. It is yet to be seen whether the Fed will relent and lower their cash rate at their January meeting. Lower interest rates abroad though would provide additional cover for the RBA to lower the domestic cash rate without further weakening the Australian dollar.

The next RBA meeting is on 18 February 2025.

Amelia Paullo
Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 1243426

If you have any questions or comments, please email me at amelia@gfmwealth.com.au

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