After months of speculation regarding official interest rate cuts, they have finally arrived. In our February 2025 economic update, we discuss the implications of an interest rate easing cycle, outline what’s on the cards ahead of the upcoming Federal Election and look at broader economic indicators.
The easing cycle begins
At their board meeting today, the Reserve Bank of Australia (RBA) Board pulled the trigger on a cut to the official cash rate target, lowering it by 25 basis points to 4.10% and kicking off a long-awaited monetary policy easing cycle.
The RBA, in their statement on the decision, noted inflationary pressures are easing slightly faster than anticipated. However, the statement went on to outline that upside risks remain, with some recent data indicating the labour market may be ‘somewhat tighter than initially thought.’ Overall, the RBA highlighted that ‘while today’s policy decision recognises welcome progress on inflation, the Board remains cautious on prospects for further policy easing.’
With this move, Australia now joins many other central banks, such as New Zealand and the United States, in commencing an easing cycle. New Zealand started lowering their interest rate in August 2024, from a peak of 5.50%. The Reserve Bank of New Zealand has made two additional cuts since, with their interest rate now sitting at 4.25%. The move from the RBA brings Australia’s cash rate target down to 15 basis points lower than New Zealand.
In the United States, the Federal Reserve capped interest rates at 5.50%, before commencing an easing cycle in September 2024. Like New Zealand, there have been two further cuts since, with America’s interest rates now sitting at 4.50%. Australia’s cash rate target is now 40 basis points lower than the United States.
After more than 15 months of speculation about when an easing cycle would begin, the focus changes to ‘what now?’.
Implications of monetary policy easing
It is likely the RBA will maintain a conservative approach to lowering the cash rate target across 2025. Westpac brought forward its rate cut prediction at the beginning of February, and forecasts that we will end the year with a 3.35% cash rate target. This is a view shared by NAB, who also revised forward its rate cut forecast.
Commonwealth Bank long maintained a February to May target band for monetary policy easing, believing a decrease of 75 basis points over the year is on the cards – a slightly more conservative forecast compared to NAB and Westpac. ANZ rounds out the big four banks with a belief that we have just experienced one of only two 25 basis point cuts to the cash rate in 2025 – the other forecast for August.
Cap rates likely to compress
For industrial property, lower borrowing costs will lead to capitalisation rates compressing and demand for assets increasing. It is likely that an uptick in property valuations will follow.
Lenders to benefit from cheaper borrowing costs
Arguably in the private sector, the falling interest rate cycle had already started with the major banks offering lower rates on some of their mortgage products. This latest move from the RBA will further allow lenders to offer more competitive rates and in turn likely see an increase in demand for financing solutions due to cheaper borrowing costs.
The RBA will be keeping a close eye on the Australian dollar
The RBA will weigh up the impact of lower interest rates on the Australian dollar ahead of any further cuts. As mentioned in our previous economic update, a country’s currency tends to rise in value when central banks raise interest rates and fall when rates are lowered.
The Australian dollar has bounced back slightly from its 1 January 2025 low, where it dipped below 62 US cents for the first time since October 2022. While the impact of today’s rate cut on the Australian dollar remains to be seen, from a macroeconomic standpoint, a global tariff war could negatively impact the dollar.
Federal Election call imminent
This year’s Australian Federal Election is set to be held on or before 17 May and will be contested on several key issues, including the cost of living, economic management, energy and housing. The sitting Albanese Government will no doubt be breathing easier with today’s news that the RBA has cut the cash rate target.
Prime Minister Anthony Albanese will likely be firming up an election date, so as to ride the relief of many Australians who were feeling the pressure of higher interest rates. A minimum of 33 days is required between calling an election and having voters hit polling booths, meaning the earliest we could see an election is Saturday 22 March 2025.
Inflation trends
Australia’s underlying inflation was 3.2% for the 12 months to December 2024. This figure was lower than the 3.6% figure in the previous quarter and also below forecasts.
Underlying inflation was the last domino to fall prior to the RBA easing monetary policy, given their steadfast stance that ‘returning inflation to target within a reasonable timeframe remains the Board’s priority’.
Trading Economics forecasts underlying inflation to reverse course slightly in Q1 2025, before landing in the RBA’s target band in Q2 (3.0%) and rounding out the year at 2.9% in Q4.
Australia’s monthly consumer price index (CPI) indicator increased by 2.5% year-on-year in December 2024, compared to 2.3% the prior month. This increase was in line with forecasts as government energy rebates waned. Trading Economics forecasts the monthly CPI indicator to hit 2% by the end of 2025 and trend around this mark throughout 2026.
Broader economic indicators
Australia’s unemployment rate inched higher to 4.0% in December 2024, compared to 3.9% in November. However, the number of employed people in Australia rose by 56,300, far surpassing the forecast of 15,000. This was largely propped up by an increase in part-time employment. Regardless, Australia’s workforce hit a new all-time high of 14.58 million people in December 2024.
The Westpac Consumer Confidence Index increased marginally from January (92.1) to February 2025 (92.2). These figures have been buoyed in the short term by promising inflationary figures. Confidence is expected to hit 100 points by the end of the year and trend around 105 points in 2026.
Australia’s dwelling prices, as measured by CoreLogic, remained the same from December 2024 to January 2025. Growth is forecast over coming months, with a 0.3% increase tipped by the end of the quarter.
Building permit approvals increased 0.7% in December 2024 to 15,174 total approvals, an improvement on the -3.4% decline in November 2024. Despite a marginal rebound, approvals were slightly below forecasts. Approvals are expected to increase by 1.1% to the end of the March quarter and trend around 0.9% in 2026.
Despite continued trying economic times, conditions are easing and green shoots have begun to emerge. Throughout 2025, Trilogy Funds will continue capitalising on new investment opportunities as they arise.
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