The prospect of lower interest rates is gaining traction as ANZ joins Commonwealth Bank of Australia (CBA) in forecasting a 25-basis point cash rate cut as early as February 2025. If realized, this could mark a turning point for Australian borrowers after a prolonged period of high rates.

Why February is on the Radar

ANZ’s adjusted forecast stems from expectations of cooling inflation. The bank predicts the Reserve Bank of Australia’s (RBA) preferred trimmed mean inflation to drop to 3.2% for the December quarter, its lowest since mid-2021. This figure is below the RBA’s current forecast of 3.4%, potentially opening the door to a rate cut at the first monetary policy meeting of the year on February 17-18.

Money markets appear optimistic, with the ASX RBA rate tracker pricing in a 78% chance of a February cut.

A Look Back at 2024

Borrowers anticipating rate relief in 2024 were left disappointed as inflation proved more stubborn than expected. While headline inflation fell, aided by government energy subsidies, underlying inflation remained above the RBA’s target of 2-3%.

November’s inflation data painted a mixed picture:

• Annual inflation rose to 2.3%, up from 2.1% in October, due to the timing of energy rebates.
• Trimmed mean inflation, however, fell to 3.2%, signaling cooling pressures.

What Will the RBA Consider in February?

Quarterly Inflation Data

The RBA will closely analyze the quarterly inflation figures, due on January 29, to confirm whether the decline in underlying inflation is sustainable.

Retail Sales

November’s retail sales rose 0.8%, driven by extended Black Friday promotions, but analysts caution this may not reflect ongoing consumer spending strength. A potential December contraction could further complicate the economic outlook.

Unemployment

Labour market tightness remains a concern. ANZ forecasts December unemployment to edge up to 4% from November’s 3.9%, but the market remains historically strong. Persistently low unemployment could weigh against aggressive rate cuts.

Changes on the Horizon

The February meeting will be the last under the RBA’s current structure. From March, a new split board will oversee monetary policy and governance matters separately, potentially bringing fresh perspectives to rate decisions.

Beyond February

ANZ also anticipates a second 25-basis point cut in August, citing the RBA’s recent signals that weaker-than-expected data could solidify confidence in inflation’s sustainable decline.

However, the bank acknowledges the possibility of a hold in February if the RBA prioritizes risks associated with tight labour markets and their potential inflationary impact.

What This Means for Borrowers

For mortgage holders and potential buyers, a February rate cut would ease borrowing costs and potentially boost consumer confidence. If paired with a subsequent cut in August, 2025 could see significant relief after a challenging period of elevated rates.

Take Advantage of Changing Conditions

If you’re considering refinancing or entering the property market, now is the time to plan. At Vantage Loans, we can help you navigate these shifts and secure a loan that aligns with your goals. Call us at 1800 595 500, email support@vantagefinancial.com.au, or visit vantagefinancial.com.au to get started.