The Reserve Bank of Australia (RBA) lowered the cash rate target by 25 basis points to 4.10% on 18 February 2025. The next RBA Board meeting and cash rate decision is scheduled for the 1st of April 2025.
RBA Governor Michele Bullock stated that the decision to cut the cash rate to 4.10% was driven by weaker private demand and easing wage pressures, making it appropriate to unwind the cautionary rate hike from November 2023. However, she emphasised that monetary policy remains restrictive and that further rate cuts are not guaranteed, as the Board remains watchful of labour market conditions and global economic uncertainty.
“It’s a very small rate cut, that’s true. It reverses the one we did in November, but I think we are removing a little bit of restrictiveness as an impact at the margin for people who have mortgages”. – Michele Bullock, RBA Governor
The Board’s decision reflects its assessment that underlying inflation is moderating—with trimmed mean inflation at 2.8% in January, up from 2.7% in December—though risks remain, particularly as recent labour market data indicate continued tightness. Future decisions will be guided by incoming data and inflation trends.
Key takeaways from the RBA’s statement:
- Cash Rate Drops to 4.10%: The rate was reduced by 25 basis points to support a gradual easing of inflation while maintaining a cautious approach.
- Inflation: Trimmed mean inflation rose to 2.8% in January, up from 2.7% in December, indicating a slight uptick in underlying price pressures.
- Wage Growth: Wage pressures have eased further, supporting disinflation, although weak productivity growth continues to limit improvements.
- Economic Weakness: Growth in output remains weak, with private demand recovering more slowly than expected, and overall household consumption remains uncertain.
- Future Rate Cuts: While progress on disinflation is evident, the RBA is cautious about further easing. Market expectations for additional cuts remain moderate, with the Board emphasising a data-driven approach amid ongoing domestic and global uncertainties.
Rate Expectations
(Source: ASX RBA Rate Tracker)
Market expectations for a rate cut have declined in recent weeks. On 11 February, there was a 27% chance of a cut, but this fell to 17% by 24 February, reflecting growing confidence that rates may remain steady in the near term.
Inflation
- January CPI Data: The Australian Bureau of Statistics’ January inflation report shows headline inflation at 2.5% over the past 12 months, up from 2.4% in December. Trimmed mean inflation, the Reserve Bank’s preferred measure, rose slightly to 2.8% from 2.7%.
- Quarterly vs. Monthly Data: While monthly CPI figures provide a snapshot, the full March quarter CPI report will be released in late April, giving a clearer picture of inflation trends.
- Cost of Living Pressures: Rent inflation eased slightly to 5.8%, while new dwelling prices saw the lowest annual rise since June 2021. However, food and beverage costs remain elevated, with fruit prices up 12.3% year-on-year.
- RBA Policy & Outlook: The RBA cut rates by 25 basis points in early February, reducing the cash rate to 4.10%—the first cut in over four years. However, economists suggest another cut may not come until mid-to-late 2025, as inflation remains a concern.
- Looking Ahead: With strong employment, steady retail spending, and government stimulus in play, inflation could remain volatile. The RBA will assess the next quarterly CPI report before its upcoming rate decision.
Property Market Update
- Capital vs. Regional Trends: In January, national home values were nearly flat (-0.03%), with capital cities showing declines (Melbourne -0.6%, ACT -0.5%, Sydney -0.4%) while combined regional areas experienced a 0.4% increase, reaching new record highs.
- Slowing Annual Growth: Annual national home value growth has more than halved from 9.7% to 4.3%, with key capitals like Melbourne (-3.3%), ACT (-0.5%), and Hobart (-0.4%) declining, and Sydney recording its lowest annual gain (1.7%) since June 2023.
- Outlook: Despite a -0.3% drop from record highs in October, higher mortgage rates and affordability constraints suggest that even with anticipated rate cuts, the housing downturn is expected to be shallow, with significant growth unlikely in the near term.
(Source: CoreLogic Hedonic Home Value Index)
Rental Market Update
- Easing Rental Growth: In January, rental growth bounced up by 0.4%, with annual rental increases at 4.4% – well above the pre-COVID average – though expectations suggest this rate will slow in early 2025.
- Regional vs. Capital Divergence: While rental growth in Sydney and Melbourne has turned negative over the past six months, regional markets have outperformed, with the regional rental index up 1.6% over the past three months compared to just 0.3% in the capitals.
- Rental Yields: Yields remain robust at about 3.5% in capitals and 4.4% regionally, though if rent growth continues to ease as property values stabilise, yields could gradually drift lower.
(Source: CoreLogic Hedonic Home Value Index)
Lending Data
- Housing Loans: New dwelling loan commitments fell by 0.4% in the December quarter of 2024, though their value increased by 1.4%. Owner-occupier commitments rose by 2.2% (value up 4.2%), while investor commitments declined by 4.5% (value down 2.9%), with first home buyer commitments growing modestly (number +1.3%, value +1.5%).
- Business Loans: Construction loans dropped 8.2% to $2.98 billion (up 28.3% year-on-year), whereas property purchase loans increased by 2.9% to $7.08 billion (up 20.8% year-on-year).
- Fixed vs. Variable Loans: Fixed-rate lending now accounts for just 2.59% of new home loans—a record low—while variable loans dominate at 98%, with fixed loan numbers up 26.0% this quarter but still 33.7% lower than last year.
Note: The Australia Bureau of Statistics (ABS) has shifted its Lending Indicators from a monthly to a quarterly release, starting from the September 2024 reference period. The next update, covering the March Quarter 2025, is scheduled for release on 14 May 2025 at 11:30 am AEST.
(Source: Australian Bureau of Statistics)
