RBA maintains holding pattern at final rate call for 2024, but open door for early 2025 cut

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At the start of this year, several rate cuts were expected across 2024.

12 months later, and several misjudgements from our best economists, no cut has materialized. and those same experts and economists are now saying May 2025 is the most likely meeting for the first cut.

The official cash rate was kept on hold at 4.35 per cent at the December meeting, however RBA Governor Michele Bullock after the statement opened the door to interest rate cuts earlier in the year.

As always, we’ve done the hard work of compiling the latest insights from the RBA, the Big Four banks, and Australia’s leading economists and experts to keep you informed.

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What did the RBA say at the November meeting?

There were notable changes in the RBA's statement accompanying the rate decision, the majority of which were positive and focused on inflation.

“The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain,” the statement noted in the opening paragraph.

“While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November.”

The statement also highlighted ongoing challenges in the economy—challenges that property experts suggest are fueling the growing conversation about a rate cut.

“National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year. Outside of the COVID-19 pandemic, this is the slowest pace of growth since the early 1990s.”

One of the most notable shifts in the RBA's rhetoric was the removal of the familiar line that the board is “not ruling anything in or out,” a statement that has been a staple for what feels like years. Instead, the RBA now suggests that the Board is “gaining some confidence that inflation is moving sustainably toward the target.”

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What did Michele Bullock say at the RBA press conference?

Bullock explained that the more dovish tone in the statement accompanying the rate hold was intentional.

“The Board wanted to give the message that they have noticed some of the data that is a bit softer. Some of its not, it’s a bit mixed, but some of it is on balance a bit softer than we had expected, and so the Board wanted to convey that their opinion and views are evolving, and they’re evolving as the data evolves. I think that’s what everyone would expect us to do

We’re not saying what we might do, but we are acknowledging that there is some softening and our forecasts do see inflation coming down gradually over the next year.

“We’re not saying that we’ve won the battle against inflation yet but we’re saying that we have a little bit more confidence that things are evolving as we think in our forecast."

Bullock wasn’t drawn on providing ‘forward guidance’, given the last ‘forward guidance’ from the RBA was taken more of a forecast. At that time earlier this year, the forward guidance was for two cuts in 2024.

However, when asked if a rate cut could come in February, she clarified that the Board does not necessarily need two or three quarterly CPI prints before making a decision on interest rates.

Bullock also acknowledged that recent figures on economic growth, consumer demand, and wages had been softer than expected, but she also cautioned that inflation remains elevated. She noted that several other key data releases — including labour market and consumption figures — will be reviewed before the RBA’s first meeting of 2025.

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What is happening with inflation?

There were mixed reactions to the quarterly inflation data released at the end of November, which markets had been watching closely to gauge the RBA's likely move at its December meeting.

Headline inflation was 2.8% for the year to the September quarter, better than the consensus among banks, which had expected 2.9%, and a decrease from 3.8% in the June quarter. This brought headline inflation within the RBA's 2-3% target range for the first time in three and a half years.

That was the good news.

However, concerns arose over the trimmed mean inflation — an alternative measure that excludes extreme price movements. This figure came in at 3.5% in October, up from 3.2% in September. The RBA places more focus on this measure, and it’s the one they want to see falling more sustainably.

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What is happening with unemployment?

While inflation is generally trending down, it’s the strength of the labour market that is preventing the RBA from cutting rates. The unemployment rate was 4.1% in October, indicating a resilient labour market. Despite the higher interest rate environment, employment has remained stable, which leads the RBA to believe there is no immediate need for rate cuts.

Employment growth remained strong over the three months to October. The participation rate is still near record highs, job vacancies remain relatively elevated, and average hours worked have stabilised.

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What are the experts saying?

All of the economists surveyed in Finder.com.au’s RBA Cash Rate Survey predicted a rate hold at the December meeting. Almost half of those surveyed expect the first rate cut to come in May 2025, with around a quarter forecasting a cut later in the year.

CommSec’s Head of Australian Economics, Gareth Aird, said, “Put simply, the Statement today read like the Board is now confident that the next move in interest rates will be down.”

Former RBA staffer and current Westpac Chief Economist, Luci Ellis, says the RBA has “clearly tilted the probabilities back towards an earlier start date for the rate-cutting phase than where it stood a few weeks ago.”

“Overall, the tone of today’s communication was less hawkish than the November round, appropriately so given the data flow since then. Today’s change of language represents a welcome acknowledgement that disinflation remains on track and that we are getting closer to the point that some of the current policy restrictiveness can be withdrawn,” Ellis said.

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When will interest rates come down?

Three of the Big Four banks have now revised their rate cut forecasts to May 2025. The last to adjust was ANZ, which had initially expected rate cuts to begin in February. Commonwealth Bank, the nation’s largest lender, is the only bank still predicting the first cut will come in February.

While the banks frequently adjust their forecasts for the first rate cut — sometimes making economists’ predictions seem less reliable — one area where they are more consistent is in their central case for the terminal cash rate, which refers to the level the RBA sees as the neutral rate.

Both CBA and Westpac expect four rate cuts over 2025, bringing the cash rate down to 3.35 per cent by year-end.

ANZ has revised its terminal cash rate forecast, now expecting only two cuts (in May and August), bringing the rate to 3.85 per cent. Meanwhile, NAB is predicting a longer easing cycle, forecasting the cash rate will fall to 3.1 per cent by June 2026.

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