Inflation falling: Is a February RBA rate cut on the cards?

The Consumer Price Index (CPI) – which measures the changing cost of a set basket of goods and services – rose 0.2% over the December quarter and 2.4% over 2024, according to Australian Bureau of Statistics (ABS) data released on Wednesday. 

That's the slowest pace of annual price growth since early 2021, more than a year before the Reserve Bank of Australia (RBA) began its fastest rate hiking cycle on record.

But that's not the number the central bank will be watching.

It's mostly concerned with underlying inflation, which fell to 3.2% annually in the December quarter.

The news will likely inspire hopes of a near-term cash rate cut – potentially at the RBA board's upcoming February meeting.

If the cash rate were to be dropped, it would likely filter through to home loan interest rates, bringing much-needed relief to many embattled mortgage borrowers.

The RBA's most recent forecast predicted underlying inflation would remain at 3.4% in the quarter just been.

The latest read looks to suggest a faster-than-expected downwards trajectory into the bank's target zone of 2% to 3% on an annual basis.

However, the central bank has previously expressed its desire to see inflation sustainably return to target, and it might take more than one surprise CPI read to convince the board that a rate cut is warranted.

Board members will come together for the final time in its current format on 17 February and will announce its cash rate decision on 18 February.

When the following meeting rolls around, there will be two RBA boards – one managing monetary policy (ergo, the cash rate) and the other handling the central bank's other duties.

Is an RBA rate cut imminent?

At the time of writing, both CommBank and ANZ predict the RBA will cut the cash rate next month.

Both banks correctly expected underlying inflation to fall to 3.2% annually in the December quarter.

CommBank is forecasting the RBA to drop the cash rate a full percentage point over the course of 2025, while ANZ predicts only 50 basis points of cutting action.

It's not just two of the big four banks that anticipate a rate cut next month.

Nearly 85% of traders are also expecting the cash rate to drop to 4.10% in February, as of market close on Tuesday according to the ASX Rate Indicator.

Though, Westpac and NAB are both sceptical.

They each predict the RBA's first downwards move will come in May.

NAB believes the board will face "no urgency to cut" next month, suggesting it might take more time to assess the employment market and economic growth, as well as inflation.

How much relief could a cash rate cut bring?

Are you a home loan holder struggling under the weight of high interest rates?

No doubt, many such borrowers will be keeping a very close eye on the outcome of the RBA's next meeting.

Here's how a cash rate cut could impact the monthly repayments of variable rate mortgage borrowers:

	Mortgage Borrowings
Interest rate (p.a.)	$400k	$450k	$500k	$550k	$600k
7.00%	$2,661	$2,994	$3,327	$3,659	$3,992
6.75%	$2,594	$2,919	$3,243	$3,567	$3,892
6.50%	$2,528	$2,844	$3,160	$3,476	$3,792
6.25%	$2,463	$2,771	$3,079	$3,386	$3,694
6.00%	$2,398	$2,698	$2,998	$3,298	$3,597
5.75%	$2,334	$2,626	$2,918	$3,210	$3,501
5.50%	$2,271	$2,555	$2,839	$3,123	$3,407
5.25%	$2,209	$2,485	$2,761	$3,037	$3,313
5.00%	$2,147	$2,416	$2,684	$2,953	$3,221

Figures as per Your Mortgage's Mortgage Repayment Calculator assuming a 30-year loan term.

---

Advertisement 

Important Information and Comparison Rate Warning

_{Image by freepik}