The Reserve Bank of Australia is expected to cut the official cash rate on Tuesday, raising hopes among mortgage holders that the era of high interest repayments will finally start to unwind.
But central bank watchers warn that people should not expect an avalanche of cuts, amid lingering concerns about inflation and the fallout from Donald Trump’s tariffs.
Will the RBA cut rates?
The RBA consistently described any talk of rate cuts as premature until it adopted a change in expression in December, when it said it was “gaining some confidence that inflation is moving sustainably towards target”.
A subsequent better-than-expected inflation reading prompted most economists to either confirm or bring forward rate-cut forecasts to 18 February. Economists from the big four banks all expect the RBA to decrease rates by 25 basis points on Tuesday.
The broader market is pricing in a 90% chance of a decrease on Tuesday, according to the ASX’s rate indicator, which tracks expectations through the pricing of cash rate contracts.
But many economists, including those forecasting a cut, think those odds are too extreme.
RaboBank’s researchers say that although they anticipate a cut on Tuesday, they do not believe it is a “fait accompli”.
“While we think the probability of a cut now exceeds the probability of no change, we hold this view with low-conviction and view the market implied probability as an exaggeration of the strength of the argument for a cut at the February meeting,” RaboBank said.
“We do not expect further cuts to come at consecutive meetings, or for the cutting cycle to be particularly deep.”
The official cash rate has sat at an elevated 4.35% since November 2023 in a period marked by high inflation and fast-rising living costs.
What happens if there is no cut?
There will be fireworks if the RBA doesn’t cut rates on Tuesday, given that it would be so counter-consensus.
This has occurred before – notably in April 2015, when the RBA held rates steady despite widespread expectations of a rate decrease.
The response at that time was for the Australian dollar to shoot up, and it would probably do the same again on Tuesday if the RBA was to hold.
The minority of economists who expect rates to remain on hold point to robust jobs figures and the danger of inflation reigniting.
The real fireworks from a hold on rates would occur on the political stage, as it would give the Coalition ammunition to argue that the Labor government has not managed inflationary pressures well enough to bring rate relief to homeowners.
A rate cut would provide some momentum for the government heading into an election fought on competing cost-of-living policies.
Are we entering a rate-cutting cycle?
ANZ has pencilled in two rate cuts this year, with one in February and again in August. CBA has a “base case” of four cuts.
RaboBank is forecasting three 25-basis-point cuts this year but sees a “material risk” if the RBA ends up only delivering two of its own.
One of those risks is linked to the weak Australian dollar, which is down from 69 US cents to about 63 US cents since September last year. A lower dollar makes imports more expensive, a cost usually borne by households and businesses buying everything from fuel and fertiliser to consumer goods.
Prof Fabrizio Carmignani, of the University of Southern Queensland, said US tariffs could also interrupt an anticipated cycle of rate cuts given it may fuel another bout of inflation.
“The real downside in all of this is clearly related to the trade policy of the US and the imposition of tariffs, especially if it leads to retaliation from other countries,” Carmignani said. “When you start charging tariffs, ultimately the cost is paid by consumers in terms of higher prices.”
US import policies are still unfolding as Australia seeks an exemption to steel and aluminium tariffs, and markets brace for any escalation in trade tension between Washington and Beijing.
Will rate cuts reignite the property market?
Homeowners and prospective buyers are often the ones who feel the most immediate impact from rate settings, given the link to mortgage repayments.
The independent Sydney auctioneer Clarence White said the market was delicately balanced with “low-commitment, price-cautious” buyers.
“There’s enough buyers that have been circling that once you do see those rates change, I’m pretty certain that will lift confidence and we’ll get most of those buyers off the fence,” said White, of Menck White Auctioneers. “They will sense that now is the time.”
Australian property prices have been buffeted by the competing forces of low supply and elevated interest rates.
Auction numbers are down almost 14% from a year ago across Australia’s state capitals, according to CoreLogic, which is a typical indicator of a subdued market.
The property valuer Gavin Hegney said if there did end up being a cycle of rate cuts, people needed to pay close attention to the reasons behind it.
“If you drop interest rates and people are scared of losing their job, the net effect is zero,” Hegney said. “If you drop interest rates and people are really confident and optimistic about the future, then watch prices explode.
“It’s the environment in which interest rates are dropping that you’ve got to read carefully.”
