Articles

What to expect from interest rates this year

03/02/2025

There’s a good chance interest rates will be lower at the end of this year than the start, although that’s far from guaranteed.

The case for a rate cut is quite strong. All four major banks believe the Reserve Bank of Australia (RBA) will reduce the cash rate multiple times this year, starting in the first half. Also, late last year, the inflation rate finally fell within the RBA’s target range of 2-3%.

However, the case against a rate cut is also compelling:

• While the official inflation rate is within the 2-3% target range, the underlying inflation rate – which excludes volatile items from price calculations and which the RBA board regards as more accurate – is above 3% and “remains too high”.
• The board has made clear it is “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome” – including keeping rates higher for longer.
• Also, the board believes “it will be some time yet before inflation is sustainably in the target range”.

The path for interest rates in 2025 will depend on both the outlook for inflation and the RBA board’s policy approach.

If the board prioritises crushing inflation, it may hold off cutting rates until it sees clear evidence that inflation is sustainably within the target band, which may not occur this year.

However, if the board wants to balance reducing inflation with supporting the economy, it may be willing to cut rates sooner.