Why February rate cut hopes are likely wishful thinking

It’s easy to understand the hope Wednesday's Consumer Price Index Indicator figures so quickly raised. For the first time since 2021, headline inflation has sat between the desired 2-3% range for longer than three months.

The Australian Bureau of Statistics data confirmed consumer prices rose 2.3% over the year to November. While higher than the 2.1% recorded in October, it’s firmly within target and was accompanied by the positive news of a fall in the RBA’s preferred measure of play, the trimmed mean.

This measure removes the most volatile price changes and has fallen from 3.5% in the 12 months to October to 3.2% for the year to November.  The news is positive, albeit far from Ms Bullock’s desired “sustained period” of sustainable inflation levels that would trigger a rate cut.

REA Group senior economist Anne Flaherty told Mortgage Choice it is unsurprising household budgets are feeling the pinch from all sides the moment.

“I think that's one of the key reasons we're seeing that flow into a slow down in property price growth,” she added.

PropTrack data showed house prices fell across Australia last month for the first time in two years, though Oxford Economics Australia (OEA) signals rates are likely to remain in restrictive territory for some time yet.

This will be unwelcome news to the millions of homeowners for whom high mortgage repayments have become a disappointing norm.

“It has now been over a year since the RBA changed the cash rate, and we expect this protracted pause will last until at least Q2,” the OEA stated in its Key Themes 2025 report.

“With underlying inflation proving to be persistent, we think the RBA will need to see at least two CPI prints where core inflation moderates further before easing rates, absent a surprise deterioration in the labour market.”

REA Group senior economist Anne Flaherty says the long-awaited slowdown in property prices is clearly linked to sustained high interest rates. Picture: supplied

This would rule out a rate cut before May and therefore also before the federal election.

“It follows that any upside surprise to inflation would push out the first rate cut to Q3,” the OEA added.

“Given the lags associated with rate moves feeding through to activity, there will be little additional stimulus on offer from the RBA in 2025.”

A key reason for home price growth slowing and then reversing in December is that interest rates have been high for such long time now, Ms Flaherty said.

“Cost of living is also still rising, even though inflation has slowed, it's still above where we would like it to be,” she added. “And of course, we've also seen wage growth slow as well.”  

Treasurer Jim Chalmers says his government is focused on tackling the cost-of-living crisis. Picture: News Corp Australia

Responding to yesterday’s figures, treasurer Jim Chalmers acknowledged public sentiment but remained unwilling to make predictions on a timeline for rate cuts.

“The good progress in the national numbers doesn’t always translate into how people are feeling and faring in the economy,” he said. “That’s why the cost of living remains the government’s number one focus.

“It is very pleasing to see this significant and substantial progress, particularly when it comes to the underlying measure.”

The RBA’s most recent communications have signalled increased confidence in managing inflation within the Australian economy, though conservatism and caution have remained dominant themes in its messaging.

“Like the government, they’re not complacent," Mr Chalmers said.

“But they are confident that we have seen and are seeing substantial and sustained progress in the fight.

Labor Party prime minister Anthony Albanese will be seeking re-election in this year's federal election. Picture: News Corp Australia

“Those Reserve Bank minutes that came out in the week of Christmas made that point very clearly and very starkly.”

Mr Chalmers own messaging comes alongside renewed concerns over government spending in an election year, with the federal government grappling with severe scrutiny over the state of the economy, pricing increases, labour market constraints and housing affordability.

While the chance of a rate cut next month may be out of reach, Ms Flaherty said mortgage holders can still feel optimistic.

“There's still a strong possibility we will see a rate cut in the first half of this year. We have been seeing inflation move in the right direction,” she said.

“The key issue is that even though headline inflation has come down very significantly, underlying inflation is still above where the Reserve Bank wants it wants it to be.

“I think until we see that consistently move into their target range, we're probably unlikely to see a rate cut.”