Why an Australian Interest rate cut will be delayed until H2 2025

The monthly CPI Figures were released today, 27 November 2024 for October 2024 showing a 2.1% inflation rate in the 12 months to October 2024, with a trimmed mean, or underlying inflation rate, figure of 3.5% (up from 3.2% in September).

It is Simaco Partner's house view that, if a rate cut is to at all happen in 2025, the Reserve Bank of Australia [RBA] will likely delay an interest rate cut until the H2 2025 due to these ongoing inflationary pressures. While inflation has eased from its peak in previous years, it remains above the Reserve Bank of Australia’s [RBA] target range of 2-3%. The RBA will likely prioritise bringing inflation into target band and any interest rate cuts will depend on further inflation moderation. As long as inflation remains stubbornly high, the RBA is expected to maintain its current stance, keeping rates higher for longer, putting continued pressure on cost-of-living.

Additionally, the Australian economy is showing signs of resilience, which will further influence the RBA’s decision-making. Despite higher borrowing costs, employment rates remain strong, and consumer spending continues at a steady pace. This economic strength means there is less immediate need for stimulus in the form of rate cuts. With unemployment at historically low levels and conditions relatively stable, the RBA is less inclined to rush into a rate reduction that could overheat the economy or reignite inflation.

Finally, global economic uncertainties, particularly in major trading partners like the US and China, will contribute to the delay. The RBA is likely to adopt a cautious approach, waiting for clearer signals of global economic stability and lower inflation before acting. Any rate cuts in Australia will be carefully timed to avoid exacerbating risks, such as an overheating housing market or rising household debt. Consequently, the most likely scenario Simaco Partners envisions is that the RBA will delay rate cuts until mid to late 2025 (if at all in 2025), when inflation is expected to be under control and economic conditions will support a more accommodating policy stance.