A meager inflation read has seemingly shone light on shadows of doubt surrounding the Reserve Bank of Australia's (RBA's) upcoming February meeting. 

Both Westpac and, now, NAB have altered their rate cut outlook in the wake of new figures released by the Australian Bureau of Statistics (ABS) on Wednesday.

ANZ brought its prediction forward earlier in January, while CommBank has long forecasted a February rate cut.

"We now expect the RBA to cut the cash rate by 25 basis points in February," NAB chief economist Alan Oster said on Thursday.

The bank now anticipates a steady easing cycle, with one rate cut per quarter in 2025 and a final cut in early 2026.

Such a trajectory would see the cash rate sitting at 3.10% by mid-2026 – down from its apparent peak of 4.35%.

NAB expects RBA to undergo 'gradual easing cycle'

But relief for mortgage holders could be slow, with NAB forecasting a "gradual easing phase".

"While the board is likely to have gained confidence that inflation will sustainably return to target as soon as late 2025, the labour market remains resilient (and there is some risk of retightening) with growth still expected to pick-up this year," Mr Oster said.

Could a strong labour market delay cuts?

A strong labour market is often a barrier to rate cuts, but some economists argue the current unemployment rate isn't as noteworthy as it might seem.

What is considered 'full employment' in Australia that is, the same number of people looking for jobs as there are job openings within businesses – may have shifted.

"It appears like Australia can sustain an unemployment rate around 4% … without causing unnecessary upwards pressure on wages growth and therefore inflation," AMP deputy chief economist Diana Mousina said on Tuesday.

"In this sense, the strength in the labour market data recently may not end up being an obstacle for the RBA to cut interest rates sooner, rather than later."

The unemployment rate remained at 4% in December, as per ABS data.

So, will the RBA cut in February?

While it's impossible to predict the RBA's moves (or holds) with certainty, most commentators and traders appear to believe a downwards shift is on the horizon.

Only 5% of traders expected the RBA to hold rates in February as of Wednesday's market close, according to the ASX's RBA Rate Tracker.

NAB analysis reveals that, since 2012, there have only been three instances in which more than three quarters of the market was pricing in a rate cut and no cut occurred.

Such happened in April 2015, February 2012, and March 2009 – all during the term of former RBA governor Glenn Stevens – according to NAB senior interest rate strategist Ken Crompton's analysis.

With the final big bank now predicting a cut, February's rate decision looks likely to be one of the most closely watched in a long time.

The RBA board will meet on 17 February with the outcome to be announced the following day.


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