When Will We See a Rate Cut?

The Reserve Bank of Australia (RBA) met early December to determine whether or not Australia’s current cash rate of 4.35% was appropriate, or if rates should change.

The Board decided to keep rates on hold at the December meeting, opting for additional time to see if the impact of slowing inflation warranted a rate cut.

The RBA said that while headline inflation has fallen, underlying inflation of 3.5% is still too high. The RBA is confident that inflation is moving sustainably to the middle of its 2% – 3% per cent target range, but it is not there yet.

Interest rates have remained at 4.35% since November 2023 – so when will we see a rate cut?

The RBA has held firm in its view that rates won’t be cut until the underlying inflation rate is within, or moving close to, the target 2% – 3% band. The most recent forecast from the RBA indicates that inflation should return to the mid-point of the band (i.e. 2.5%) in 2026 – however this does not mean we will have to wait until 2026 to see interest rates reduce.

If the RBA is confident that inflation is on a downward trajectory it may start reducing rates sooner, over a longer period, rather than cutting rates all at once.

Investment markets are currently pricing in a rate cut early to mid-next year, perhaps even as soon as February, but most likely closer to April/May. It is important to remember that the situation is fluid, and the timeframe could move if inflation remains resilient.