Swing in living costs opens door for rate cut – with a catch

Hope has emerged for homeowners after a surprise economic finding that’s paved the way for the RBA to cut interest rates – but any relief will come with a catch.

Homeowners could finally get some interest rate relief, with a drop in underlying inflation giving the Reserve Bank grounds to cut the cash rate in February.

ABS data released Wednesday showed trimmed mean inflation, which the RBA relies on for a more accurate indication of inflation changes, was 3.2 per cent over the 12 months to December.

This was below the 3.4 per cent level forecast by the RBA.

Economists claim it’s the signal the RBA needs to slash rates, with headline inflation also falling to within the 2-3 per cent target range of the central bank at 2.4 per cent.

The main reasons for lower CPI inflation were due to a fall in prices for electricity and automotive fuel and moderating price rises for new dwellings.

The inflation figures have sparked hope of a 25 basis points cut in interest rates in mid-February.

Many homeowners say they would be forced to sell if a rate cut doesn’t come by May. Picture: Max Mason-Hubers

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But a rate cut could make life tricky for aspiring homeowners. KMPG data released this week showed an interest-rate cut could spark another uptick in prices – especially in 2026.

Rate cuts are expected to serve as a morale boost to homebuyers for the second half of 2025 and will carry forward into 2026, KPMG said.

The forecast growth in prices across Sydney and Melbourne – the markets most affected by rate changes – would be 7.8 per cent and 6 per cent, respectively. In the case of Sydney, this would add nearly $100,000 to the city median house price in a year.

Financial markets are factoring in a 78 per cent chance of a rate cut in February, while ANZ and Commonwealth Bank predict a cut next month.

AMP chief economist Shane Oliver said before the inflation release that this kind of drop in inflation would make it “very hard for the RBA to avoid cutting”, although he clarified “it’s not certain”.

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Reserve Bank Governor Michele Bullock has said inflation would be vital in determining rates policy. Picture: John Appleyard

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Betashares chief economist David Bassanese told media a drop in trimmed mean inflation would encourage the RBA to cut rates in February.

Commonwealth Bank senior economist Stephen Wu was also expecting a February rate cut.

“With headline inflation already in the target band, the expected undershoot on underlying inflation relative to the RBA’s latest forecasts is likely to prompt a re assessment of the extent of inflationary pressures in the economy,” he said.

REA Group senior economist Eleanor Creagh said that with inflation lower than the RBA expectations “the odds of a February cut will firm further, keeping the February meeting live”.

Property listings have already been rising in recent months, which have helped moderate prices. Picture: Adam Yip

Canstar data insights director Sally Tindall said the inflation figures would play a “critical role” in determining RBA policy but “it never boils down to just one dataset”.

“The RBA will be looking through every layer of the data,” she said.

“Much of this could come down to motivation. If the RBA is looking for a reason to cut, it might find enough evidence in today’s CPI data.

“However, if the Board is more inclined to keep the cash rate on hold for another couple of months, it already has enough to support its case.”

A survey from mortgage comparison group Finder.com.au showed a large share of homeowners were urgently awaiting interest rate relief.

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Close to two in five homeowners said they were struggling to pay their mortgage, while one in nine mortgage holders said they’d have to sell or apply for hardship if rates stayed the same until May.

A 25 basis points drop in the cash rate would save a mortgage holder with a $641,416 loan (the national average) about $103 a month.

The savings would be substantially higher in the more expensive capital cities, considering a loan of about $1.16m is required to buy the average Sydney house using a 20 per cent deposit.

Finder head of consumer research Graham Cooke said mortgage stress remained an area of concern.

Canstar analyst Sally Tindall said core inflation would not be the only measure interesting the RBA. Picture: Tim Hunter.

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“Thousands of mortgage holders are under immense financial strain and can’t manage high repayment costs much longer,” he said.

“Many households will have to make changes to their lifestyles if the RBA doesn’t start to cut rates.”

Mr Cooke said many borrowers had been forced to drain their savings to keep on top of repayments.

“Households across the country are desperate for relief through interest rate reductions.”

Ms Tindall said: “The last two and a half years have been incredibly tough for households with a variable rate mortgage, particularly those that overstretched themselves to get into an overheated property market when rates were at record lows.”

Originally published as Swing in living costs opens door for rate cut – with a catch