Reserve Bank interest rates: Financial markets predict a little more relief on the way in 2025

RBA Governor Michele Bullock has moved swiftly to pour cold water on financial market projections that borrowers could get two more doses of rate relief before 2025 is over.

The Reserve Bank cut interest rates by 25 basis points to 4.1 per cent on Tuesday amid growing confidence inflation is coming under control.

But Ms Bullock warned markets were “too confident” in forecasting further cuts this year.

“The market is expecting quite a few more interest rate cuts to the middle of next year . . . whether or not that eventuates will depend on the data.

Markets were on Monday evening predicting two more cuts would follow in 2025, taking the official cash rate to 3.6 per cent by December.

By the close of play on Tuesday, those bets had only been marginally dialled back. Traders still priced in a 79 per cent chance of a cut at the next meeting in April.

Debate will rage in coming days whether Ms Bullock was jawboning — seeking to keep borrower hopes in check by talking tough — or signalling her board will hold fire for months.

Regardless, the days of emergency low rates near zero per cent during COVID-19 are now a distant memory.

Ms Bullock has frequently said in press conferences that the board feels rates are modestly restrictive, indicating there will not be much room to cut.

On Tuesday the message was similar.

The RBA is still “cautious” and removed only “a little of the policy restrictiveness”. Going too hard would stall the inflation fight and mean price rises remain above the target band, the statement said.

Economists are at loggerheads over how low the RBA will go, with many already warning borrowers not to expect back-to-back relief.

Investment bank Morgan Stanley on Sunday said it would be challenging to slow inflation further. Core inflation was 3.2 per cent in December — heading towards the RBA’s target zone but not yet in the band.

The bank expected only one more cut this year, in May.

“We expect the RBA to cut the cash rate by 25 basis points to 4.1 per cent at its February meeting given good inflation progress, dovish commentary and strong expectations for easing,” equity strategist Chris Nicol said.

“Forecasts will likely show lower near-term inflation, slower labour market progress and continued (economic) recovery.

“We expect commentary at the meeting to be relatively cautious — welcoming the December quarter inflation progress but noting the headwinds and uncertainties to sustained disinflation for 2025.

“We expect a total of 50 basis points of easing for 2025.”

That would be two cuts.

Corelogic research director Tim Lawless said borrowers “shouldn’t get our hopes up for a rapid or significant rate cutting cycle in the near term”.

AMP chief economist Shane Oliver said the RBA would probably take a breather.

“We expect the RBA to hold in April and then cut in May and August taking the cash rate to a low of 3.6 per cent with another cut next year,” he said.

“The start of a gradual easing cycle should help boost economic growth . . . and provide support for the share market and the residential property market, albeit some of the good news on rates has already been factored in.”

International experience shows investors and households should not assume the inflation fight is over.

The US Federal Reserve lowered interest rates by one percentage point to be 4.25 per cent to 4.5 per cent in December. But inflation bounced back the following month, spooking markets.

Markets give a 47 per cent chance the US central bank will leave rates unchanged until at least June.