The Reserve Bank of Australia (RBA) is widely expected to cut the official cash rate on Tuesday, potentially easing the burden on mortgage holders after a prolonged period of high-interest repayments. However, economists caution that the anticipated rate reduction may not signal the start of a rapid or deep easing cycle, given ongoing inflation risks and external economic pressures.
Market expectations and economic forecasts
The RBA has maintained a 4.35% cash rate since November 2023, a level intended to curb inflation and stabilize the economy amid rising living costs. Until recently, the central bank had dismissed discussions of rate cuts as premature. That stance shifted in December when the RBA acknowledged growing confidence that inflation was moving toward its target range.
Market sentiment strongly favors a cut, with the ASX rate indicator pricing in a 90% probability of a 25-basis-point reduction on Tuesday. Major banks, including Commonwealth Bank, ANZ, Westpac, and NAB, have aligned their forecasts with this expectation.
Despite the widespread assumption of a rate cut, some analysts urge caution. RaboBank’s researchers consider a February reduction more likely than not but warn against viewing it as a certainty. They also predict that any further cuts will be spaced out rather than occurring in consecutive meetings.
What if the RBA holds rates steady?
If the RBA chooses to maintain the cash rate at 4.35%, it could trigger significant financial and political reactions. A surprise decision to keep rates unchanged has historical precedent—such as in April 2015, when an expected rate cut did not materialize. The immediate market response at that time was a surge in the Australian dollar, and a similar reaction could be expected on Tuesday.
A rate hold could also have political ramifications, particularly with an upcoming federal election likely to focus on cost-of-living concerns. The opposition may argue that the Labor government has not effectively managed inflationary pressures, limiting relief for homeowners and consumers.
Are rate cuts the start of a broader easing cycle?
Economists remain divided on whether the expected cut signals the beginning of a broader rate-cutting cycle. Forecasts among major financial institutions vary:
- ANZ predicts two cuts in 2024, one in February and another in August.
- Commonwealth Bank (CBA) has a base case of four cuts over the year.
- RaboBank expects three cuts, but acknowledges the risk of only two.
One potential constraint on further cuts is the Australian dollar’s decline from 69 US cents to 63 US cents since September. A weaker currency raises import costs, affecting prices for fuel, consumer goods, and agricultural inputs. Additionally, potential US trade tariffs under Donald Trump’s policies could increase global inflationary pressures, complicating the RBA’s ability to ease monetary policy.
Impact on the property market
For homeowners and prospective buyers, interest rate movements have a direct impact on mortgage repayments and housing affordability. The Australian property market has experienced low supply and high interest rates, which have tempered buyer activity.
Real estate experts suggest a rate cut could boost market confidence. Independent Sydney auctioneer Clarence White described current buyers as “low-commitment, price-cautious”, but believes lower rates could prompt more decisive action.
“There’s enough buyers that have been circling that once you do see those rates change, I’m pretty certain that will lift confidence,” White said.
However, property analyst Gavin Hegney warns that the economic context matters just as much as interest rates. If rates drop amid job insecurity or economic uncertainty, the effect on property prices may be negligible. Conversely, if consumer confidence remains strong, lower rates could lead to renewed price surges.
