After years of rising interest rates, homeowners are eagerly anticipating a long-awaited break as they await potential rate cuts. Recent economic indicators suggest that the wait may soon be over. With the latest inflation figures showing a return to the Reserve Bank of Australia’s (RBA) target range, there is growing speculation about when we could see the first rate cut of the cycle.
Inflation Trends and What They Mean for Rate Cuts
The December 2024 Consumer Price Index (CPI) data from the Australian Bureau of Statistics (ABS) has brought some good news for the Australian economy. Headline inflation is now within the RBA’s target range of 2-3% for the second consecutive quarter, a key benchmark in the bank’s monetary policy. Trimmed mean inflation, which the RBA uses to gauge underlying price pressures, came in slightly above target at 3.2%, reflecting some continued pressure, but still a sign of moderation.
CPI rose by 0.2% from October to December, marking a steady pace of inflation and keeping annual inflation at 2.4% for the year leading up to December. This marks the slowest inflation growth seen in the past four and a half years, according to Michelle Marquardt, head of price statistics at the ABS.
Given these figures, the RBA is likely closer to achieving its goal of a “sustained period” of moderate inflation, which may provide a basis for rate cuts in the near term.
Is February the Month for Rate Cuts?
With these promising inflation figures, market expectations have risen significantly. As of now, there is close to an 80% chance that the RBA will announce a 25-basis point rate cut in February. However, while these indicators point toward a rate reduction, it’s still not a done deal. We’ll need to see if inflation continues to trend downward and whether other economic data, like employment and wage growth, align with a rate-cutting cycle.
What Are the Banks Doing?
Despite speculation about an imminent rate cut, banks have been relatively quiet in terms of adjusting fixed or variable loan rates. To date, BCU Bank and Macquarie Bank have made slight reductions to fixed rates, but most of the big banks—ANZ, Westpac, Commonwealth Bank, and National Australia Bank—haven’t made any major moves yet.
ANZ, Westpac, and Commonwealth Bank are predicting a rate cut as soon as February, with Commonwealth Bank even suggesting homeowners could see up to four rate cuts in 2025. National Australia Bank, on the other hand, forecasts five cuts but doesn’t expect any movement until May. It’s clear that expectations for future cuts vary, but the consensus is that a reduction is likely in the near future.
Home Prices and the Rate Cut Outlook
Housing costs have been a significant driver of inflation, and recent trends in home prices are fueling hope for rate cuts. According to PropTrack, national home prices fell for the first time in two years in December, with capital cities leading the decline. The national median home price has dropped by $5,000 to $795,000, although it remains 4.73% higher than a year ago.
For potential homebuyers, uncertainty about the timing of rate cuts remains a concern. However, some buyers may look to act quickly, anticipating that prices will rise once rate cuts begin. Historically, we’ve seen home prices increase as interest rates begin to fall, driven by boosted buyer confidence and improved borrowing capacity.
That said, the price increases may not be as dramatic as in previous easing cycles. Affordability is already stretched, meaning the rebound in home prices could be more muted. Still, with rate cuts on the horizon, the recent price declines are likely to be short-lived.
Final Thoughts
With inflation now within the RBA’s target range, the stage seems set for a potential rate cut soon. Homeowners and buyers alike should watch for the February RBA meeting, where a rate cut could provide some relief after a long period of rising interest rates. While banks haven’t made any major moves yet, expectations for easing are building, and housing prices may start to pick up as buyer confidence returns. If the RBA moves forward with rate cuts, we could see a boost in the housing market and overall economic activity in the months ahead.
As always, the situation is fluid, and the RBA will be closely monitoring inflation trends and broader economic conditions to determine the right timing for any further rate adjustments.
