RBA rate cut expected, but uncertainty lingers

Most expect the RBA’s decision to be a straightforward one, following a recent miss in Australia’s Q4 consumer price index (CPI), which has heightened expectations for a rate cut – even with a still-strong labour market. However, many admit that the cut is far from certain.

Saxo’s chief investment strategist, Charu Chanana, said: “The Australian Q4 CPI miss a few weeks ago has really prompted expectations that the RBA will cut this time around – although the labour market is still quite strong, so the RBA doesn’t need to be as aggressive.”

The strategist added that the RBA could opt for a more cautious stance with a 25-basis-point cut, maintaining a hawkish tone.

“The market is currently pricing in three cuts in 2025, which seems a bit excessive, so the RBA will need to bring that down,” she added.

Turning to the Australian dollar (AUD), Chanana indicated that while the AUD could see a short-term dip following an RBA cut, the currency remains relatively strong, with positive sentiment from China’s economic outlook, combined with a likely weakening of the US dollar, expected to support the AUD in the longer term.

In a similar vein, Scott Solomon, co-portfolio manager at T. Rowe Price, predicted a 25-basis-point cut at the upcoming meeting. He stressed that not cutting would risk the RBA’s credibility, particularly given its emphasis on returning inflation to the 2–3 per cent target range.

“If one is searching for a reason not to cut, growth would certainly be the place to start, but it’s worth a reminder that policy will remain restrictive post a 25 bp cut. The risk that a 25 bp cut would supercharge growth or inflation is slim,” Solomon noted.

Solomon also highlighted the importance of global events in shaping future decisions. With Australia avoiding the brunt of impactful tariffs, he expects the RBA to proceed cautiously, offering balanced guidance that avoids signalling a rapid or extensive rate-cutting cycle.

Shane Oliver, chief economist at AMP, similarly expects a 0.25 per cent cut, citing a growing confidence that inflation is sustainably returning to target. Oliver also believes that the RBA would likely maintain a cautious stance on future rate cuts, especially with low unemployment and a weak Australian dollar.

“We expect three rate cuts this year but it’s likely to be a gradual process with the next move unlikely until May, which will be well clear of the upcoming federal election,” he said.

But experts agree that a cut is not certain, with Bob Cunneen, senior economist at MLC Asset Management, raising the possibility the RBA’s nine-member committee may be divided over inflation risks.

“There may be disagreements and indeed divisions over the inflation risks. The RBA’s most recent forecasts as of November 2024 were for headline inflation to rise to 3.7 per cent by December 2024. Essentially, the RBA’s view is that electricity subsidies were temporary. There are also persistent price pressures in the services sector such as insurance, rents, and hospital and medical which will also see the RBA question whether the inflation threat has faded sufficiently,” Cunneen said, adding that he does still expect a cut.

“Given that Australian financial conditions are tough, economic activity is subdued and inflation has fallen, there is a strong case for the RBA cutting interest rates on Tuesday.”

Deutsche Bank’s macro strategist, Lachlan Dynan, explored the potential outcomes if the RBA decides to hold in his market note. While Dynan shares the view that the RBA will ease policy, he raised concerns that markets might be underestimating the possibility of a surprise hold.

“If the RBA were to hold, we’d still expect them to retain the easing bias they shifted to in December. Doing so would moderate the impact of a surprise since the hold would speak more to a timing decision, rather than depth of overall easing expected,” Dynan said.

Reflecting on the AUD, he said under a hold Deutsche Bank sees AUD/USD rising by 0.5-1 per cent.

February’s board meeting is the last time the RBA will meet in its current format, with the two-board system due to kick in from next month.