29/01/2025
In recent insights shared by The Adviser, Westpac Group (Westpac) has revised its forecast for the Reserve Bank of Australia’s (RBA) cash rate, now predicting the central bank will begin its rate-cutting cycle as early as next month. This change follows the release of inflation data that exceeded market expectations, strengthening the case for a rate reduction sooner than previously anticipated.
Westpac joins other major banks, including Australia and New Zealand Bank (ANZ) and the Commonwealth Bank of Australia (CBA), in adjusting their cash rate forecasts. While National Australia Bank (NAB) has yet to update its predictions following the latest Consumer Price Index (CPI) data, Westpac’s new outlook aligns with the growing consensus that the RBA may begin its easing cycle in February 2025.
Inflation Data Shifts the Outlook
The catalyst for Westpac’s revised forecast is the December 2024 CPI data, which showed a larger-than-expected drop in inflation. According to Luci Ellis, Westpac’s Chief Economist, the latest inflation figures have tipped the balance toward a February rate cut. Ellis noted that, although inflation data should not determine monetary policy alone, the CPI’s sharper-than-anticipated decline provided enough evidence to conclude that disinflation has proceeded faster than the RBA had expected.
The inflation rate for the December quarter came in at 0.5 percent, with the trimmed mean annual inflation standing at 3.2 percent. This provides the RBA with a level of confidence that inflationary pressures are easing, supporting the case for a rate reduction. Ellis pointed out that the better-than-expected inflation data outweighed other mixed signals in the economy, including the resilient labour market.
A Mixed Economic Picture
While inflation has shown signs of easing, the labour market remains stronger than anticipated. December’s unemployment rate held steady at 4 percent, below the RBA’s November forecast. Ellis acknowledged the ongoing resilience in the job market but concluded that the positive inflation data outweighed these stronger labour market conditions, suggesting a rate cut is more likely.
Westpac also highlighted softer housing-related inflation, which has been a key concern for the central bank. Recent data suggests that rents and home-building costs have decelerated more quickly than expected, reinforcing the notion that domestic price pressures are beginning to cool.
Political Considerations and Timing
Ellis also noted potential political implications surrounding the timing of a rate cut, particularly in light of upcoming changes to the RBA’s board. There is a concern that a rate cut under the current board might appear politically motivated if the board is revamped soon after. However, Ellis suggested that the RBA might act sooner rather than later to avoid the appearance of political interference. She pointed out that if the current board held rates steady in February and the revamped board cut rates in April, it might look like the government “stacked” the board to achieve the desired result.
Wider Consensus on Rate Cuts
Westpac’s new forecast aligns with that of other banks such as ANZ and CBA, both of which have also reaffirmed their expectations for a February rate cut. ANZ’s Catherine Birch highlighted that the trimmed mean inflation data, which was below the RBA’s forecast, suggested the central bank would likely opt for a 25 basis point reduction at its February meeting. Similarly, CBA’s Gareth Aird noted that the softer-than-expected CPI data would encourage policymakers to begin easing sooner rather than later, with a 25 basis point cut in February in line with their base case.
Aird also expressed optimism about the broader inflation trajectory, noting that the disinflation process appears to be gaining momentum. He further anticipated that the RBA would continue its easing cycle through 2025, with a total of 100 basis points of cuts over the course of the year.
Market Expectations and Outlook
Financial markets have already priced in a high probability of a rate cut in February, with current forecasts suggesting a 92 percent chance that the RBA will act. Alongside major banks, smaller lenders like Bendigo Bank and AMP Bank have also predicted a February rate reduction, further solidifying the expectation that the central bank will begin its easing cycle next month.
As the economy navigates the uncertain landscape of inflation, housing costs, and labour market dynamics, all eyes will be on the RBA’s upcoming meeting. With the CPI data showing signs of progress on the inflation front, the stage appears set for a policy shift that could provide relief to borrowers and reshape the economic landscape for 2025.
In conclusion, the consensus across major banks like Westpac, ANZ, and CBA indicates a growing certainty that the RBA will begin reducing rates in February, signalling a pivot towards a more accommodative monetary policy in response to improving inflation conditions. However, the final decision will hinge on the central bank’s assessment of the broader economic picture, with the possibility of a more cautious approach still lingering.
