The Reserve Bank of Australia (RBA) is expected to begin cutting interest rates in 2025, with major banks and economists predicting the first reduction to occur between February and May.

This anticipated shift comes after a period of high interest rates aimed at curbing inflation.

Current Economic Landscape

As of January 2025, the RBA has maintained the cash rate at 4.35% since November 2023. This steady stance reflects the central bank’s cautious approach to balancing inflation control with economic growth. Recent data shows:

  • Headline inflation has decreased to 2.8% over the year to the September quarter
  • Underlying inflation remains at 3.5%, above the RBA’s 2-3% target range
  • Economic growth has slowed to its weakest level since the 1990s recession, excluding the pandemic period

Big Four Banks’ Predictions

Australia’s major banks have varying forecasts for interest rate cuts in 2025:

  • Commonwealth Bank (CBA): Expects the first cut in February 2025, with four reductions bringing the cash rate to 3.35% by December 2025
  • National Australia Bank (NAB): Predicts the initial cut in May 2025, with the cash rate reaching 3.10% by mid-2026
  • Westpac and ANZ: Both foresee the first cut in May 2025, with Westpac projecting a cash rate of 3.35% and ANZ aiming for 3.85% by August 2025

Factors Influencing RBA’s Decision

Several key factors will shape the RBA’s approach to interest rate cuts:

  1. Inflation trends
  2. Labor market conditions
  3. Consumer spending and confidence
  4. Global economic factors, including China’s economic performance
  5. Domestic economic growth

Financial markets are pricing in a high probability of rate cuts in 2025. The ASX 30 Day Interbank Cash Rate Futures for February 2025 indicate a 73% expectation of an interest rate decrease to 4.10% at the next RBA Board meeting.

Potential Impact on Homeowners and the Economy

A reduction in interest rates could provide relief to mortgage holders and stimulate economic activity. However, the RBA remains focused on ensuring inflation returns to its target range sustainably before implementing cuts.