Aussie inflation is falling! Now when will the RBA finally cut interest rates?

With inflation sliding, will the RBA now cut interest rates in February?

| More on:
A young man wearing a backpack in a city street crosses his fingers and hopes for the best.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (ASX: XJO) closed up 0.6% on Wednesday and is up another 0.4% today after yesterday's lower-than-expected inflation print has upped expectations of lower interest rates from the Reserve Bank of Australia.

As we reported here, the ABS data showed that the Aussie consumer price index (CPI) rose 0.2% in the December quarter and 2.4% annually. That was down from the 2.8% annual rise reported in the September quarter.

Now, the RBA's preferred gauge when it comes to its interest rate policies is underlying inflation, also called trimmed mean inflation. This excludes certain volatile items like electricity and petrol.

While higher than core inflation, underlying inflation dropped to 3.2% in the December quarter, down from 3.6% in the September quarter. That's the lowest level in three years and getting quite close to the RBA's target range of 2% to 3%.

ASX 200 investors are now hoping the RBA will cut interest rates at its upcoming meeting on 18 February. That would mark the first easing since November 2020. Australia's official cash rate currently stands at 4.35%, the highest level in 13 years, with the last rate hike delivered in November 2023.

Will Australians see a February RBA interest rate cut?

Well, if you go by majority vote, a February interest rate cut is now looking highly likely.

According to the RBA Rate Indicator, money markets have priced in a 95% chance the RBA will decrease rates to 4.10% at its next meeting, which would come as welcome news to most ASX 200 companies.

Offering his insight on that outlook, Monash University economist Isaac Gross said:

While the unemployment rate remains low, this low inflation should give the RBA scope to cut interest rates at its next meeting and maybe even again in May.

While electricity subsidies and more Commonwealth Rent Assistance helped drive down the inflation rate, the slowdown in inflation extended far beyond these categories as the ABS reports that we saw prices falling in household furnishings, health expenditure, petrol and new houses.

Commenting on the declining CPI news, Luke Fossett, general manager at GoCardless ANZ, said, "While the news is encouraging, it may not quite be enough to prompt the RBA to cut interest rates at their next meeting in February."

Although he has his doubts about a February cut, Fossett added, "These results feel like a turning point for the Australian economy, and a rate cut now seems more likely to occur in the first half of this year."

What are the ASX 200 banks forecasting?

ANZ Group Holdings Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) economists now all expect the RBA will move to ease interest rates in February.

National Australia Bank Ltd (ASX: NAB) was expecting the first cut in May and has yet to revise that forecast.

Explaining why ASX 200 investors could see the first rate cut in 2025 arrive in February, Westpac chief economist Luci Ellis said (quoted by The Australian Financial Review):

With trimmed mean inflation at 0.5% in the quarter [and] 3.2% year-ended, 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.

But with inflation still having the potential to revive, not everyone is convinced the RBA is in such a hurry to reduce interest rates.

According to KPMG chief economist Brendan Rynne:

The RBA wants to see inflation sustainably within the target band and we are just not there yet. Assuming core inflation continues to fall over the coming months we believe that the RBA will be in a position to cut rates in May, with April a possibility.

Stay tuned!

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. 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.

More on Share Market News

Two smiling work colleagues discuss an investment or business plan at their office.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A young man talks tech on his phone while looking at a laptop. A financial graph is superimposed across the image.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

ASX 200 technology stocks led the market with a 1.99% rise while the benchmark index slipped 0.24%.

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Broker Notes

These ASX 200 shares could rise 30% to 40%

Analysts are tipping these shares to generate big returns over the next 12 months.

Read more »

A female worker in a hard hat smiles in an oil field.
Broker Notes

Buy BHP and this ASX 200 share next week

Here are a couple of shares that Bell Potter rate highly this month.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Share Market News

I'd listen to Warren Buffett and invest in ASX shares with wide economic moats

It could pay to follow in the footsteps of Warren Buffett. Here's what you need to know about moats.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
Best Shares

Top oversold ASX shares to buy in February 2025

Hoping to bag an investment bargain this month?

Read more »

People sit in rollercoaster seats with expressions of fear, terror and exhilaration as it goes into a steep downward descent representing the Novonix share price in FY22
Share Gainers

Here are the top 10 ASX 200 shares today

ASX investors had a rough end to the trading week this Friday.

Read more »

A panel of four judges hold up cards all showing the perfect score of ten out of ten
52-Week Highs

Big ASX news: 10 ASX 200 shares hit new 52-week highs today

Do you own any of these lucky stocks?

Read more »