Mortgage relief: RBA expected to cut interest rates on Tuesday

The RBA board has come together for the last time in its current format, and most experts, commentators, and market participants forecast it will hand down a cut. 

The outcome of the meeting will be announced at 2:30 pm AEDT on Tuesday, with borrowers, businesses, and financial markets watching closely.

It comes after inflation figures for the December quarter showed the 13 rate hikes put forward between 2022 and 2023 appear to be working to control consumer prices.

The Consumer Price Index (CPI) revealed underlying inflation – the RBA's preferred measure – rose 3.2% over the year to the December quarter.

That's a stone's throw off the central bank's target range of 2% to 3% and more than half what it was when it peaked in December 2022.

But it's not just the cash rate that will be worthy of discussion tomorrow.

The RBA's board will become two after its February meeting, with one steering monetary policy and the other overseeing the central bank's other duties.

Punters and experts tip RBA cut

The latest inflation data was enough to force all four big banks into agreement, with Westpac and NAB adjusting their forecast for the first rate cut on the Australian Bureau of Statistics' release.

CommBank had forecasted a February cut for a number of months already while ANZ changed its outlook earlier this year.

However, confidence among market traders has since wavered.

As of Friday afternoon, 90% of market participants expect the RBA will pass down a cut tomorrow – down from 95% earlier this month.

Is there still risk of a hold?

Of course, until the RBA board hands down its decision, there's a chance it will decide another month – or more – of high interest rates are needed to get prices under thumb.

The labour market could factor into such a decision.

While inflation has eased, unemployment remains low, and a tight labour market can fuel wage growth and inflation pressures.

If the RBA holds steady tomorrow, it may also delay a cut at its April meeting, pushing potential relief further into 2025.

While the central bank is politically neutral, the upcoming division of its board could present 'a question of timing and tactics'.

"The forthcoming change of the make-up of the board could create some awkward optics around timing", Westpac chief economist and former-RBA assistant governor Luci Ellis said in late January.

"If the current board held rates steady in February and then the revamped board cut rates in April, it would look like the government 'stacked' the board to get the desired result."

The potential of such optics could be a sticking point pushing the board to cut this month, Ms Ellis said, noting board members might "opt to get on with it rather than get caught up in the politics of the situation".

What happens next?

A February rate cut would likely mark the beginning of a broader easing cycle, with economists at the big four banks predicting up to three more before year's end.

If four cash rate cuts were passed down, totalling a 1% reduction, those holding an average new home loan (worth $665,978) with a typical, variable rate could pay $420 less per month.

However, there's no guarantee banks and lenders will fully pass on cash rate cuts, particularly subsequent cuts if they were to occur later this year.

If the RBA keeps rates on hold, attention will likely shift to the central banks' April and May meetings.

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