Where are interest rates heading in 2025?
Will a Rate Cut Come in February?
Interest rates play a crucial role in shaping the economic landscape of any country, and Australia is no exception. The Reserve Bank of Australia (RBA) has made frequent headlines over the past year, adjusting rates to manage inflation and stimulate or cool down the economy. As we approach the next RBA meeting on 18th February 2025, many are asking: will we see a rate cut? Let’s look at the likelihood of this event, the potential benefits, and the broader impact of interest rate movements over the last 12 months.
The Likelihood of a Rate Cut in February 2025
As of January 2025, the likelihood of a rate cut in February hinges on several factors, primarily inflation, jobs numbers and economic growth. According to the Australian Financial Review, there’s a three in four chance of a rate cut, coming from recent job figures indicating unemployment rose to 4.0% in December 2024.
Over the last year or so, the RBA has held a hardline stance, holding the cash rate at 4.35% for a consecutive 10 months to combat rising inflation, which had reached high levels post the pandemic, not seen in Australia for decades. However, as inflation has shown signs of easing and the economy begins to cool, analysts are speculating that the RBA may soon consider cutting rates to support growth and ensure that the economy doesn’t slip into a recession.
In recent months, inflation has moderated from its peak, and consumer price growth has slowed. The RBA’s primary goal is to bring inflation back within its target range of 2-3%. If inflation continues to trend downward in the coming months, and if economic activity remains subdued, the RBA may feel comfortable in reducing rates to spur investment and consumer spending.
Additionally, the global economic environment is also a factor. If major economies like the U.S. or China show signs of further slowdown, the RBA may take a more subtle approach to keep the Australian economy competitive and resilient. However, any decision will be highly dependent on inflation data released in the weeks leading up to the February meeting.
The Benefits of a Rate Cut
For households, a rate cut means a slight reduction in mortgage payments, which can ease financial stress for homeowners and assist in the cost of living burden that many families and homeowners are experiencing.
As borrowing costs drop and the economy shows signs of recovery, consumer confidence is likely to improve. People may feel more optimistic about their financial future, encouraging increased spending and contributing to economic stability.
Businesses are likely to borrow more for expansion or new projects when interest rates are lower. This can drive economic growth, create jobs, and lead to a more robust economy.
A lower interest rate environment tends to weaken the Australian dollar, making Australian exports cheaper and more competitive on the global market. This can benefit exporters and help improve the trade balance.
Interest Rates Over the Last 12 Months: A Year of Tightening
Over the past 12 months, Australia has seen a significant shift in monetary policy. The RBA began raising interest rates in 2022 to combat inflation, which was at its highest in. By the end of 2023, the cash rate had climbed steadily by 4%, marking one of the most rapid tightening cycles in Australian history.nThe consequences of these rate hikes have been far-reaching.
Higher mortgage rates have dampened the housing market, with many potential buyers being priced out. Home prices in major cities such as Sydney and Melbourne have slowed considerably, and auction clearance rates have dropped. For homeowners, many are feeling the pinch as they face higher repayments on variable-rate mortgages, and seen an influx of properties entering the market, especially holiday homes and investment properties, as homeowners try to relieve some of the pressure.
As borrowing costs increase, consumer spending has also slowed. Households have been more cautious, with many reducing discretionary purchases or relying more heavily on savings and credit. This has had an impact on retail and service industries, which are seeing weaker growth. This in turn is seeing small retail businesses closing down, impacting the small business economy.
While higher rates may help contain inflation, businesses have had to adjust to the increased cost of financing. Small business been particularly impacted, as their access to affordable credit has become more limited.
The RBA’s aggressive rate hikes have had a clear effect on inflation. By late 2023, inflation started to moderate, falling from 7.8% in December 2022 to around 5.3% by the end of 2023. While still above the RBA’s target range, this represents significant progress in curbing price growth.
The labour market has remained relatively strong, with unemployment teetering at low levels. However, as the economy slows, the risk of a weakening job market becomes more pronounced. The RBA has walked a tightrope in balancing inflation control with preserving employment. Many large institutions have undertaken mass redundancies in an effort to address cost pressures.
Impact on Households
For Australian households, the higher interest rates have been both a burden and a challenge. For many homeowners, mortgage stress has become a pressing concern. Those with variable-rate loans have seen their monthly repayments increase substantially, putting strain on household budgets. The ABS reported a surge in the number of people seeking financial advice or assistance, as rising rates forced many to rethink their spending and saving habits.
On the other hand, savers have benefited from higher interest rates, with many seeing better returns on savings accounts and term deposits. However, for the majority of Australians, especially those with mortgages, the net effect has been negative, as the cost of servicing debt has increased.
Additionally, as inflation has cooled, the pressure on household budgets has eased somewhat, but the combination of higher rates and cost-of-living pressures has kept many families on edge. The full impact of this rate cycle will likely become clearer in the coming months, particularly if a rate cut is implemented in February.
My Thoughts
The past 12 months in Australia have been marked by aggressive interest rate hikes aimed at controlling inflation. While these measures have had a cooling effect on the economy, they have also put significant pressure on households and businesses, particularly those reliant on debt.
Looking ahead to February 2025, the likelihood of a rate cut depends largely on inflation trends and the state of the economy. If inflation continues to fall and the economy remains sluggish, the RBA may opt for a rate reduction to stimulate growth. Such a move would bring some relief to households and businesses struggling with higher borrowing costs, while also supporting economic stability. As always, the RBA’s decisions will be closely watched, with every rate movement closely scrutinised for its impact on the broader economy and the financial well-being of Australians.
Disclaimer
This publication has been sourced and compiled by Cambridge Private Wealth Pty Ltd, a corporate authorised representative (CAR No. 1301027) of Noble Private Wealth Pty Ltd ABN 61 670 170 555 AFSL 551391. Past performance is not a reliable indicator of future performance. Any outlooks in this publication are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on, are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from our outlooks. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice.
