The big four banks now all believe rates will be cut in February

All four of the big banks now agree on when the Reserve Bank board will cut interest rates following welcome inflation data this week.

All four of Australia’s largest banks now believe there will be a rate cut in February when the Reserve Bank board holds its first meeting of the year.

“We now expect the RBA to cut the cash rate by 25 basis points in February,” NAB chief economist Alan Oster wrote in a note.

“The Q4 CPI confirms that inflation has moderated more quickly than the RBA expected and sets up a likely downward revision to the inflation profile in the February statement on monetary policy.

“This now makes February the most likely starting point for a gradual easing in interest rates.”

All four of the big four banks now agree the Reserve Bank will cut the official cash rate in February. Picture: Newswire

While updating the timing from May to February for the first cut, the bank says they still expect 75 to 100 basis points in reductions in 2025.

By February 2026 they think the cash rate will hold at 3.1 per cent – down from the 4.35 per cent where it has been since November 2023.

NAB believes the weaker than expected inflation figures released by the Australian Bureau of Statistics on Wednesday will offset the strength in the labour market, where unemployment is currently at 4 per cent.

“While the labour market remains strong, we do not see current conditions as inflationary,” Mr Oster said.

“However, the RBA’s growing confidence will need to come in part from a reassessment of tightness in the labour market.”

The ABS data showed Australia’s trimmed mean inflation fell to 3.2 per cent in the December quarter, down from 3.5 per cent in the September quarter.

This beat the RBA’s own 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.

Westpac also updated its rate prediction following Wednesday’s figures.

Westpac chief economist Luci Ellis says a rate cut “is on”, pushing forward by three months her prediction that the Reserve Bank will cut the official cash rate from 4.35 cent.

Ms Ellis, who was formerly the RBA assistant governor economics, 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.

CBA and ANZ previously came out with rate cut predictions in February, with CBA calling it three months ago.

But at least on leading Australian economist remains unconvinced the RBA should cut rates when it meets on February 17-18.

Talking to Sky News, Judo Bank chief economic adviser Warren Hogan says there is less than a 50 per cent chance of the RBA cutting rates, saying “the economic case is not there”.

“We’ve seen a big improvement in consumer sentiment late last year, the tax cuts have finally got some traction,” he said.

“The jobs growth is now showing low retail sales, and the big one was the rise in job vacancies from already high levels.

Warren Hogan disagrees with the major banks calling for rates to be held in February. Picture: NewsWire / John Appleyard

“This is all telling us that the economy is actually improving, and that’s the reason there’s a question mark on whether inflation will get down into the target band and stay there.”

Mr Hogan said we should learn the lessons from the US, which raised rates faster than Australia before starting a rate-cutting cycle that has recently been paused on inflation fears.

“If you look at what’s happening in the United States, the fact that they held on cutting rates further overnight highlights this point,” he said.

“The reason they did it, despite expectations from just a few months ago that they were going to take the federal funds rate down another 100 basis points, if not more, is because inflation stopped falling and the economy is showing resilience, and there’s job growth, unemployment slow, so this is the same situation we have here.”

Money markets are factoring in a greater than 75 per cent chance of a rate cut in February.

Originally published as The big four banks now all believe rates will be cut in February