Economists and banks all but certain Reserve Bank will deliver a rate cut on Tuesday

Welcome cost-of-living relief for households is imminent, with most economists and all major banks forecasting a rate cut this week. But experts don’t agree on one key thing.

Welcome cost-of-living relief for households is imminent with most economists and all major banks forecasting a rate cut this week, but experts are divided on just how low they will go.

Money markets are more than 90 per cent certain the Reserve Bank will agree to reduce the current cash rate of 4.35 per cent on Tuesday, after last month’s inflation figures showed price rises were consistently trending to return to the board’s target range for cuts.

Australia’s four major banks are forecasting a rate cut on Tuesday.

Slashing the rate by 25 basis points to 4.10 per cent would mean an owner-occupier paying principal and interest on the average variable mortgage rate of 6.33 per cent with 25 years remaining on a $600,000 loan would save about $92 a month, according to analysis by Canstar.

The savings for a $750,000 under the same conditions would be about $115 per month, while for a $1m loan the mortgage holder would save about $154 on their monthly repayment.

Commonwealth Bank of Australia (CBA), Westpac, NAB and ANZ are all forecasting a cut this week, but beyond February predictions range from a total of between two and five cuts bringing the cash rate down to anywhere between 3.85 per cent and 3.10 per cent.

Economist Saul Eslake expects a rate cut in February and a second within months. Picture: Chris Kidd

Amid the various forecasts, independent economist Saul Eslake said there were three key reasons why he believed the RBA would not only slash rates in February, but deliver three cuts over the course of this year, including a second as soon as April or May.

“I think the data gives (the RBA) the degree of confidence that they’ve previously and repeatedly said they require that inflation is sustainably headed back towards the target range, that’s point one,” he said.

Relief is in sight for Australian mortgage holders. Picture: Brenton Edwards

Mr Eslake said the second reason was that although the labour market had remained “pretty tight” with the unemployment rate at 4 per cent as of December, wages growth had slowed from 4.3 per cent to 3.5 per cent over the first three quarters of last year.

“The third reason is that … monetary policy works with a lag, in other words what the Reserve Bank does today doesn’t affect the economy tomorrow, it affects of over the following six to 18 months,” he said.

“Inflation is also a lagging indicator so if (the RBA) were to delay, they run the risk of … undershooting the inflation target.”

Mr Eslake said he believed the bank would eventually return the cash rate to what was considered a more “neutral” position of about 3.5 per cent over a series of cuts, likely three, this year.

AMP chief economist Shane Oliver says May is a more likely month for a second cut than April. Picture: NewsWire / John Appleyard

AMP chief economist Shane Oliver said he was also expecting a rate cut in February despite some economic factors that might be seen as countering such a decision.

“Our unemployment is still low, the Aussie dollar is down from its highs, there’s uncertainty about US President Donald Trump’s tariffs and what they will mean, but I don’t think those things are enough to stop a rate cut, particularly given that interest rates will still be high,” he said.

Mr Oliver said the stronger labour market also meant there wasn’t the “urgency” for the RBA to undertake “rapid” reductions.

As a result he expected the RBA would be “noncommittal” in their language around future rate cuts, with May a more likely date for a second reduction given the board would have more data to consider than when it next meets in April.

“I think from an inflation point of view, there is strong argument to ease,” he said.

Originally published as Economists and banks all but certain Reserve Bank will deliver a rate cut on Tuesday