Why the Reserve Bank could be convinced to cut mortgage interest rates next month

A rate cut could come as early as next month when the Reserve Bank meets for the first time in 2025 – despite persistent inflation in some goods and services.

Australian Bureau of Statistics data released on Wednesday shows prices rose 2.3 per cent over the year to November, compared with 2.1 per cent over the year to with October.

Despite the rise in headline inflation, there has been a cooling of all-important underlying inflation – which takes away irregular or temporary price changes – which could convince the RBA to cut rates.

Wednesday’s figures show declining gasoline and electricity prices, but rents and groceries are still rising.

Electricity prices fell by 21.5 percent and car fuel fell by 10.2 percent, but food and drinks rose by 2.9 percent, alcohol and tobacco rose by 6.7 percent and recreation and culture rose by 3.2 percent.

The agency’s monthly report provides valuable information on price direction, but it is the less volatile quarterly figures that the RBA is watching more closely.

The reduced average fell to 3.2 percent in November, down from 3.5 percent.

The November figure was also slightly lower than the Reserve Bank’s last projection in December, and potentially low enough to convince the bank to cut rates at its February 18 meeting.

The RBA kept interest rates steady at 4.35 per cent at its last meeting of 2024, but Governor Michele Bullock revealed the board believed inflation was being tamed.

Commonwealth Bank is the only one of the big four banks to stick to its original rate timing forecast, expecting the first cut to take place in February.

NAB, Westpac and ANZ previously agreed on this, but have all since revised that forecast and now expect no reduction until May.

Sally Tindall, Canstar’s director of data insights, warned borrowers not to count on interest rates falling.

“If you have a mortgage, don’t just cross your fingers and hope for the best,” she said.

‘Take the lead this coming summer by keeping your interest rate as low as possible, by negotiating or by refinancing.

“That way, when cuts finally come to the RBA, you can have your cake and eat it too.”

State Street Global Advisors APAC economist Krishna Bhimavarapu said: “We can now confidently say that disinflation is accelerating.”

“The annual discounted average (3.2 per cent) continued to move towards the Reserve Bank of Australia’s target range, and on the more encouraging side, inflation in the new home category was the weakest since mid-2021,” he said .

The central bank has placed more emphasis on underlying inflation measures, as they are better insulated against volatility and temporary price changes due to, for example, energy bill relief.

Treasurer Jim Chalmers said both the headline and underlying figures were moving in the right direction.

“Headline inflation is now in the bottom half of the Reserve Bank’s target for three months in a row for the first time since 2021,” he told reporters on Wednesday.

‘We know that inflation does not always follow a perfectly straight line.

‘When we came to power, inflation was at six and rising. Now inflation has a two ahead of it.’

Treasurer Jim Chalmers said inflation is moving in the right direction, despite seeing a rise in inflation in the latest figures

Paula Gadsby, senior economist at EY, said continued inflation in the prices of services was enough evidence for the RBA to keep interest rates at their previous levels.

The economist said the central bank needs further evidence against the December quarter inflation figures, which will be released at the end of January, and ahead of the RBA’s meeting in February.

“Moderate productivity growth, a resilient labor market and strong government spending can keep inflation high,” she said.

“This likely indicates that the Reserve Bank board has kept the cash rate at 4.35 percent for the first quarter of this year, and possibly beyond.”

Total annual inflation in November rose from 2.1 percent to 2.3 percent.

Although an increase was expected, the rebound slightly exceeded expectations of a 2.2 percent result.

ABS head of prices statistics Michelle Marquardt said the rise in annual headline inflation partly reflected the timing of the government’s energy subsidies.

“In some states and territories, households received two rebate payments in October instead of receiving no payment in July,” she said.

‘From November, most households received one benefit.’