February RBA rate cut: Inflation falls but poor Aussie dollar worries

Falling inflation has given struggling homeowners their best hope yet the RBA will cut rates soon. But one big detail could ruin the party.

Homeowners may get mortgage relief sooner than they think.

Inflation has fallen within the target range of the Reserve Bank and opened the door to an interest-rate cut in the first half of this year, with hopes of a cut as early as February rising.

The ABS’ latest inflation data released Wednesday showed the Consumer Price Index came in at 2.3 per cent annually in November, marginally up from the 2.1 per cent recorded over the 12 months to October.

Inflation edged up slightly due to rises in food prices, but it was still within the target range of the Reserve Bank of Australia, who will next meet in February to discuss monetary policy.

Financial markets are expecting about a 70 per cent chance the RBA will slash the cash rate at that meeting, according to indicators calculated by the ASX.

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Housing demand has been moderating while interest rates have stayed higher. Picture: Sam Ruttyn

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A 0.25 per cent cut in the cash rate would trim about $90-$100 off the average monthly repayments on a $600,000 home loan.

Further good news for mortgage holders is that economists widely expect the more important trimmed mean inflation rate – which takes out more erratic costs like energy – to fall.

The trimmed inflation rate will be released in late January and is now expected to come in below the Central Bank’s earlier forecasts.

That report will likely play a greater role in the RBA’s next cash rate decision and whether Governor Michele Bullock moves the official cash rate off its 13-year high of 4.35 per cent.

RBA Governor Michele Bullock will announce the next rates decision in February. Picture: Monique Harmer

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Ahead of the latest inflation data release, Treasurer Jim Chalmers told ABC radio said that the figures would give a hint of the RBA’s next steps.

“I won’t pre-empt the decisions taken independently by the Reserve Bank, but we do know that inflation in the monthly figures and in the quarterly figure is now within the Reserve Bank’s target range,” he said.

A potential spanner in the works for monetary policymakers is that the Australian dollar recently fell to three-year lows.

The inflationary pressures of a weak dollar will be a talking point for the RBA, but it’s not clear to what extent it will affect its rates decision.

Treasurer Jim Chalmers said new inflation figures would give a hint of what’s to come from the RBA. Picture: Getty Images

It’s worth noting that three of the big four banks are still expecting a first rate cut to occur in May. NAB, Westpac and ANZ had previously predicted a first cut in February, but revised their forecasts in late 2024.

Commonwealth Bank is the only big four bank that has stuck to its early call for a first rate cut in February.

Canstar data insights director Sally Tindall said in a company release that homeowners should still keep in mind that there was “no iron-clad guarantee we’ll see cuts”.

“If you have a mortgage, don’t just cross your fingers and hope for the best,” she said.

“Get on the front foot over summer by knocking down your interest rate as far as possible, either by haggling or refinancing.

“That way, when RBA cuts do finally come, you can have your cake and eat it too.”

Interest rate hikes, plus price rises, have meant repayments on homes in some areas have doubled since 2022.

Prior to the monthly CPI data release, Commonwealth Bank said the annual trimmed mean measure was expected to drop from 3.5 per cent in October to 3.4 per cent in November.

CBA senior economist Stephen Wu said in a note that updates for the prices of things like services would “drive the RBA’s assessment of domestically generated inflation”.