The RBA is expected to cut interest rates this year. Here's what to watch

Many, including economists and financial markets, are hoping and anticipating some interest rate relief for mortgage borrowers this year. After the Reserve Bank of Australia (RBA) held the cash rate target at 4.35% for over a year, a cut of at least 0.25 percentage points is expected in 2025.

The Reserve Bank of Australia (RBA) board will meet eight times this year. The first meeting of 2025 will take place on February 17-18. The two-day board meeting will be followed by a policy announcement at 2:30 pm (AEST) on Tuesday and a press conference. After that, meetings are tentatively scheduled for the following dates, although the RBA has said some of the dates may change: March 31-April 1, May 19-20, July 7-8, August 11-12, September 29-30, November 3-4, and December 8-9. This is the second year the board has reduced the number of meetings, previously holding 11 meetings a year. While there are fewer planned opportunities for rate cuts, it can also call emergency meetings and make out-of-cycle adjustments, as was seen during the COVID crisis.

As for when the expected rate cuts will arrive, it depends on who you ask, but many economists are penciling in May for the first cut. This includes economists from ANZ, NAB, and Westpac, who are all expecting a 25 basis point cut at the May meeting, which would bring the cash rate down to 4.1%. The Commonwealth Bank's economics team is sticking to February for the first cut, but also acknowledges uncertainty following stronger-than-expected jobs market data. As for financial markets, an indicator calculated by the Australian Securities Exchange (ASX) shows a 73% chance of a rate cut in February.

If the banks pass on the rate cuts to customers – and one can imagine the outcry if they don't – borrowers could choose to reduce their repayments. According to comparison site RateCity, if the RBA cuts the cash rate by 25 basis points in May, a borrower with a $500,000 home loan today would see their monthly repayments reduced by $76. This is based on an owner-occupier paying principal and interest on an average existing variable rate of 6.33%. If there were two cuts, one in May and one in August, the monthly repayments would be $151 lower. For a borrower with a $1 million home loan today, one cut would save $153 a month and two cuts would save $303, RateCity said. Potential buyers and those looking to refinance may find they have greater borrowing capacity as rates fall.

As Governor Michele Bullock has stressed, inflation is the RBA's top priority. The post-meeting statement in December stated, “Returning inflation to target sustainably within a reasonable timeframe remains the Board’s highest priority.” The Australian Bureau of Statistics (ABS) will release the following inflation data ahead of the RBA’s February meeting: January 8 – the monthly Consumer Price Indicator for November; and January 29 – the quarterly Consumer Price Index for the December quarter, and the monthly indicator for December. The state of Australia’s jobs market is also considered important for decision-making, as employment has remained resilient in the face of high interest rates, despite a slowing economy. Gareth Aird, head of Australian economics at the Commonwealth Bank, described the December labour force survey, released on January 16, as a “key input into the RBA Board decision in February” after the unemployment rate unexpectedly fell to 3.9% in November. He wrote: “The labour market needs to show signs of easing in December for the RBA to consider February the appropriate month to start normalising the cash rate.” In addition, the central bank will be closely watching household spending over the holiday period. The ABS will release multiple retail trade figures and a monthly household spending indicator ahead of the February meeting, while reports from retailers may provide a more timely reflection of holiday trading. Of course, any overseas developments, particularly the state of the Chinese economy and government stimulus, as well as tariff threats from incoming US President Donald Trump, could influence the RBA's decision-making.

Of course, banks do not need to wait for the RBA to adjust their home loan rates, and many have already begun to do so in anticipation of changes to come. According to RateCity, there were 29 cuts to variable home loan rates between October and mid-December last year. This compares to just seven increases to variable rates. In terms of fixed home loans, banks appear keen to lock in customers as they expect rate cuts in the future. Over the three months, one-year, two-year and three-year fixed rates were cut more than 40 times.