When Will Australian Interest Rates Go Down?

Alex

The Reserve Bank of Australia’s (RBA) decisions on interest rates are shaped by a range of economic indicators and policy considerations. 

This article explores the current economic environment, the RBA’s stance, and my expert predictions to provide insights into when interest rates in Australia might decrease.

Australia’s Current Economic Condition

Inflation Pressures: As of the third quarter of 2024, Australia’s underlying inflation stands at 3.5%, exceeding the RBA’s target range of between 2 and 3%. RBA Governor Michele Bullock has emphasized that inflation remains too high for rate cuts to be considered in the near term. According to RBA forecasts, inflation is not expected to reach the midpoint of the target range until 2026.

Labour Market: Australia’s labour market remains robust, with an unemployment rate of 4.0% as of December 2024, driven by strong demand for skilled workers in sectors like health and education, which has contributed to sustained wage growth. 

Significant public spending on infrastructure and government programs, has created jobs in specific industries, making it even harder for the RBA to tackle inflation. While this supports household incomes, it also adds to inflationary pressures, making near-term interest rate cuts unlikely. 

Reserve Bank of Australia’s Policy Position

At its December 2024 meeting, the RBA held the cash rate steady at 4.35%. The accompanying statement suggested a cautious and data-dependent approach, with certainty either way of cutting, holding or raising rates in 2025. It’s very much contingent on a sustained decline in inflation and broader economic improvements.

Other Key Factors Influencing our Interest Rate Movements

Household Debt: Australia’s high household debt levels make the local economy particularly sensitive to interest rate changes. Prolonged elevated rates could strain household budgets, reducing consumer spending and slowing economic growth. However, this dynamic may push the RBA to consider lowering interest rates sooner, to relieve household financial pressures.

Economic Growth: Fitch Ratings projects Australia’s economy will grow by just 1.2% in 2024, a reflection of restrictive monetary policy and persistent inflation. Slower growth could prompt the RBA to consider rate cuts, to stimulate the economy, especially if other indicators, such as inflation show signs of improvement.

Big Four Banks Market Expectations

Economists from major financial institutions anticipate that the RBA will begin cutting interest rates in 2025, though the timing remains uncertain. For example:

  • Australian and New Zealand Bank (ANZ) predicts the first rate cuts could occur in May 2025.
  • Commonwealth Bank (CBA) suggests cuts might commence as early as February 2025, provided inflation trends downward more rapidly than expected.
  • Westpac Bank (WBC) forecasts rate cuts beginning in May 2025, emphasizing a cautious approach due to ongoing inflation risks.
  • National Australia Bank (NAB) projects rate reductions by May 2025, contingent on a clear and sustained drop in inflation alongside stable economic growth.

While the RBA has kept the cash rate at 4.35% through the end of 2024, its cautious approach signals that rate cuts are unlikely in the immediate term. 

Most indicators suggest that any significant adjustments will be delayed until inflation shows sustained improvement.

Market forecasts point to possible rate reductions beginning in mid 2025, but recent data and the RBA’s longer-term outlook imply that substantial decreases may not materialize until early 2026. 

By then, inflation is expected to align more closely with the RBA’s target range, creating a more favorable environment for easing monetary policy. 

The RBA’s priority remains balancing inflation control with economic growth, ensuring any rate adjustments are measured and responsive to evolving conditions.

About Alex Carpenter

Alex Carpenter is a highly experienced residential buyer’s agent and real estate professional, renowned for her dedication, market expertise, and personalized client service throughout her more than ten years in the industry. Known for uncovering hidden property gems and negotiating favorable deals, she has become a trusted advisor to both first-time buyers and seasoned investors. Further to this, Alex is passionate about researching, exploring and reviewing gentrifying and up-and-coming suburbs with strong community involvement and diverse culture. She is often found exploring new and older neighbourhoods or volunteering at local initiatives.