Will the RBA Cut Rates in February? The Decision That Could Save You Thousands

Will the RBA Cut Rates in February? The Decision That Could Save You Thousands

A leading Australian economist remains sceptical that the Reserve Bank of Australia (RBA) will cut interest rates in February, despite increasing expectations from financial markets and major banks.

Speaking to Sky News, Judo Bank’s chief economic adviser Warren Hogan suggested there is less than a 50 per cent chance of a rate cut when the RBA meets on February 17-18, arguing that "the economic case is not there."

"We've seen a significant improvement in consumer sentiment towards the end of last year, tax cuts are starting to take effect, and job growth remains solid despite weak retail sales. The most telling indicator was the rise in job vacancies from already high levels," he explained.

Hogan also pointed to the U.S. Federal Reserve’s recent decision to pause its rate-cutting cycle, despite previous expectations of further reductions. "The U.S. experience shows that cutting too soon can be risky. Inflation there stopped falling, and job growth remains strong—similar to what we’re seeing in Australia."

His cautious stance comes despite a notable drop in trimmed mean inflation to 3.2 per cent in the December quarter, down from 3.5 per cent in September. This result undershot the RBA’s forecast of 3.4 per cent, prompting three of Australia’s four major banks to revise their predictions in favor of a February rate cut.

Westpac chief economist Luci Ellis, a former RBA assistant governor, now believes the central bank will move next month. "With trimmed mean inflation at 3.2 per cent, disinflation has proceeded faster than expected. That should give the RBA confidence to begin the easing cycle in February," she stated.

Money markets reflect growing anticipation, with traders pricing in a 95 per cent chance of a February rate cut—up from 75 per cent before the latest inflation data was released.

ANZ, Commonwealth Bank, and Westpac are now united in forecasting a February rate cut, while National Australia Bank is reviewing its expectations, having previously predicted a move in May.

However, some analysts warn the RBA may remain cautious, given Australia’s robust job market and ongoing fiscal stimulus. "The RBA may hesitate to lower rates too soon, especially since their forecasts suggest inflation could rise again in 2025," noted Bob Cunneen, chief economist at MLC Asset Management.

Citi’s global rates strategist Ben Wiltshire also highlighted the RBA’s dilemma: "On one hand, inflation is cooling faster than expected, but on the other, employment remains strong. The question is whether disinflation alone is enough to justify a rate cut."

Market reactions have been mixed. The Australian dollar weakened slightly, bond yields edged lower, and shares approached record highs in anticipation of looser monetary policy.

While moderating services inflation could give the RBA confidence that inflation will settle around 3 per cent, some experts predict a cautious approach. "We anticipate a mild rate-cutting cycle, given high public spending in both Australia and the U.S.," said Tim Hext, head of government bond strategies at Pendal.

Matthew McCabe, CEO of Newcastle Advisors, weighed in on the situation, stating, "While a rate cut could provide short-term relief to borrowers, the RBA needs to ensure it doesn’t fuel another inflationary cycle. Timing is everything, and patience may be the best strategy right now."

Ultimately, the RBA faces a balancing act: cut rates now to support economic growth or hold steady to ensure inflation remains under control. With financial markets heavily favoring an imminent rate cut, the February meeting looms as a critical decision point for Australia’s monetary policy.