Westpac joins CBA and ANZ expecting a rate cut in February

In welcome news for mortgage holders, a third major bank is now expecting a rate cut in February following lower-than-expected inflation data.

Three of Australia’s big four banks are now expecting a rate cut in February following a lower-than-expected inflation data released on Wednesday.

Westpac’s chief economist Luci Ellis says a rate cut “is on” pushing forward by three months her prediction the Reserve Bank will cut the official cash rate from 4.35 cent at its February board meeting.

Ms Ellis, who was formerly assistant governor economics at the RBA, said the good news on inflation beat the stronger news on the labour market, with the RBA looking for unemployment to rise slightly to tame inflation.

“With trimmed mean inflation at 0.5 per cent in the quarter (3.2 per cent year), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the board will have the required confidence to start the rate-cutting phase in February,” she said.

The Commonwealth and ANZ banks had already tipped the RBA would move at its February 17-18 meeting. NAB had forecast the first cut to be in May, but has said its cash rate forecast is under review.

The latest underlying inflation print from the Australian Bureau of Statistics released on Wednesday came in at 0.5 per cent for the December quarter.

The yearly trimmed mean inflation rate fell to 3.2 per cent, down from 3.5 per cent in the September quarter.

This beats the Reserve Bank’s forecast for Australia’s trimmed mean inflation to come in at 3.4 per cent for the 12 months until December and 0.7 per cent for the final quarter of the year.

Headline inflation – which includes the more volatile parts of the CPI – rose by 0.2 per cent in the December quarter, to come in at 2.4 per cent for the 12 months until December 31.

ABS head of price statistics Michelle Marquardt said Australia’s trimmed mean inflation was falling.

“The trimmed mean excluded price falls in both electricity and automotive fuel this quarter, alongside other large price rises and falls,” Ms Marquardt said.

“As a result, trimmed mean annual inflation of 3.2 per cent was higher than CPI inflation of 2.4 per cent.”

The rates market is pricing in a 75 per cent chance of a 25 basis point rate cut at the RBA’s February 17-18 board meeting, which would take the official cash rate to 4.10 per cent.

More importantly, the rates market is pricing 85 basis points of rate cuts for 2025, which would see the RBA’s official cash rate end the year at 3.5 per cent.

Australia’s inflation rate undershoots the RBA’s expectation. Picture: NewsWire / Nicholas Eagar

Government welcomes news on inflation

The Australian government welcomed the news of falling inflation, which is now at a three- year low.

Federal Treasurer Jim Chalmers took to social media to welcome the ABS data.

“On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said.

Mr Chalmers said the figures were better than expected.

“It’s not mission accomplished, but it means we’ve made much more progress,” he said.

“Inflation was higher and rising under the Liberals, but it’s lower and falling under Labor.

“Inflation is now almost a third of the 6.1 per cent we inherited when we came to office.”

He said inflation was moderating faster than what Treasury had forecast in its December budget update and proved Australia was on track for a “soft landing”.

“Many countries around the world have paid for progress on inflation through higher unemployment or lower economic growth, but we’ve been able to preserve the gains we’ve made in our labour market at the same time as we’ve got inflation down,” Mr Chalmers said.

Jim Chalmers welcomes the news of falling inflation. Picture: NewsWire / Nadir Kinani

Any decision by the RBA to cut rates would be a huge win for Labor, with an election to be held by May 17.

Labor could have two opportunities for a rate cut before the election deadline, with another rate decision slated for April 1.

But shadow treasurer Angus Taylor said the December data showed core inflation was still “stubbornly above target”.

“It hasn’t moved much in the last 12 months and underneath that is a situation where Australians continue to pay more at the check-out,” Mr Taylor told reporters.

“We’ve seen the biggest collapse in Australian standard of living in our history, higher than our peer countries, and that pain is not going away.

“We’ve got an economy that has been in a household recession for a record seven consecutive quarters and, again, none of our peer countries have seen that situation.

“We’re absolutely at the back of the pack in beating inflation and getting the low-inflation strong economy we all want to see.”

Economists say “cut, baby, cut”

Betashare’s chief economist David Bassanese said “cut, baby. cut!” in response to the news on the trimmed mean inflation.

“There’s now a good chance trimmed mean underlying inflation could fall back to with the RBA’s 2-3 per cent inflation target band by June, rather than the RBA’s current expectation of December,” he said.

“As a result – and despite still solid employment growth – there’s no question the economy deserves an interest-rate cut to ease the restrictiveness of current policy settings.”

A rate cut could be imminent according to economists. Picture: NewsWire / Nikki Short

BDO economics partner Anders Magnusson said the December figures should give more hope for mortgage holders getting a rate cut early.

“If we focus only on the domestic economy, I believe the door is now open for the RBA to announce its first rate cut in over four years in the upcoming February meeting,” he said.

“However, we may need to wait another quarter for the RBA to be satisfied that underlying inflation is on track to reach and remain within the target range of 2 to 3 per cent.”

But the partner also said there were looming global uncertainties which could affect a rate cut in February.

“Australia’s dependence on resource exports and crucial trade relationships, especially with China, heightens the stakes,” he said.

“The new Trump administration’s tariff policies could lead to increased import costs and supply chain disruptions, and there are fears these factors could offset positive developments in Australia’s economy.”

AMP chief economist Shane Oliver told NewsWire prior to the announcement anything below 0.7 per cent opens the door to an earlier than expected cut to the official cash rate of 4.35 per cent at the RBA board’s February 17-18 meeting.

“The RBA needs to see a trimmed mean inflation rate of 0.6 per cent for the quarter or less,” Dr Oliver said.

“The focus is not on the headline number which we know will be low due to energy rebates.” Prior to the announcement market expectations were for the quarterly inflation rate to undershoot the RBA’s expectation coming in at 0.5 to 0.6 per cent for the quarter.

Where inflation changed

The quarterly growth in recreation and culture was driven by domestic holiday travel and accommodation (+5.7 per cent).

Higher prices for airfares and accommodation coincided with higher travel demand during the school holidays.

The rise in alcohol and tobacco prices was mostly driven by tobacco (+5.8 per cent) reflecting the 5.0 per cent annual tobacco excise increase and biannual Average Weekly Ordinary Time Earnings based indexation that applied from 1 September 2024.

The biggest falls were in energy based largely on government rebates, although the RBA ignores them as they are a temporary measure.

“The 2024-25 Commonwealth Energy Bill Relief Fund rebates led to a large fall in electricity prices this quarter,” Ms Marquardt said.

“Electricity prices fell by 9.9 per cent in the December 2024 quarter, following a fall of 17.3 per cent in the September 2024 quarter.

“Without the rebates, electricity prices would have risen 0.2 per cent this quarter.”

New dwelling prices also dropped marginally for the first quarterly fall since June 021, while automotive fuel prices fell 2 per cent in December, following a 6.7 per cent fall in September.

Originally published as Westpac joins CBA and ANZ expecting a rate cut in February