Pressure to provide relief through lower rates

The rising cost of living is putting pressure on the RBA to provide some relief to households through lower rates.

Interest rates in Australia have stayed high through 2024 even though other countries have started cutting theirs. This is mainly because Australia’s economy has held up quite well – we’re not in a recession and plenty of people still have jobs. However, many households are feeling the strain of high living costs.

Looking ahead to 2025, financial markets think the Reserve Bank of Australia (RBA) will cut interest rates twice in the second half of the year. But this prediction could change depending on how things play out.

Several factors will influence when and how much the RBA cuts rates:

The most important is inflation. While it’s now back within the RBA’s target range, there are risks it could rise again. One big unknown is what happens in the United States. With Donald Trump winning the presidential election, this will boost government spending and put high taxes on Chinese goods. This could push up prices worldwide, including in Australia, making it harder for the RBA to cut rates.

The health of Australia’s economy is another key factor. If people start spending less in shops, house prices fall significantly, or unemployment begins to rise, the RBA might need to cut rates sooner than planned. They’ll be watching these signs closely throughout the year.

But if the economy keeps doing well and inflation stays under control, the RBA will probably stick to its careful approach. This means making small, well-spaced cuts rather than rushing to lower rates quickly.

The rising cost of living is putting pressure on the RBA to provide some relief to households through lower rates. However, they’ll want to be sure that cutting rates won’t cause inflation to pick up again. They’ll need to balance helping struggling households against keeping inflation under control.

In summary, while rate cuts are likely in 2025, their timing and size will depend on how inflation behaves, what happens in the global economy (especially in the US), and how well the Australian economy holds up through the year.

ARTICLE COURTESY – NERIDA CONISBEE – CHIEF ECONOMIST, RAY WHITE