RBA interest rate cut relief: cash rate dropped to 4.10 per cent

The RBA has finally cut the cash rate after the December quarter Consumer Price Index (CPI) figures showed lower-than-predicted inflation.

Australian mortgage holders can breathe a sigh of relief. The period of high interest rates is finally over, as the RBA cuts by 25 basis points, bringing the official cash rate down to 4.10 per cent.

“It’s the relief that Australia has been waiting for,” says Domain chief of research and economics Dr Nicola Powell.

“We are now in a rate loosening cycle,” she says. “But I don’t think that we’re going to see back-to-back rate reductions. [The RBA] will watch and wait, and then we won’t see another rate cut, probably until mid-year.”

The quarterly CPI, an indication of inflation, rose by 0.2 per cent in the December 2024 quarter, but annual inflation fell to 2.4 per cent. Both are now within the RBA’s target range of 2 to 3 per cent. 

“[The] December quarter’s rise was the same as the 0.2 per cent increase in the September 2024 quarter. These rises were the lowest recorded since the June 2020 quarter when the CPI fell during the COVID-19 outbreak when childcare was free,” says Australian Bureau of Statistics (ABS) head of prices statistics Michelle Marquardt.

However, the trimmed mean inflation – which excludes volatile prices and also factors into the RBA’s decision – was still slightly above the target at 3.2 per cent in the December quarter.

“The trimmed mean excluded price falls in both Electricity and Automotive fuel this quarter, alongside other large price rises and falls. As a result, trimmed mean annual inflation of 3.2 per cent was higher than CPI inflation of 2.4 per cent,” says Marquardt.

Despite the trimmed mean inflation being above the RBA’s target, Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics, says the RBA’s cut means they want to get ahead of the game.

“If [the RBA] is satisfied that the trimmed mean is coming down and it’s going to be within the target range, it makes sense for them to move before inflation gets below 3 per cent because that has an impact on demand in the economy, which impacts inflation. That process all happens really slowly, so they want to be ahead of the curve,” he says.

“If we wait until it gets to below 3 per cent or 2.5 per cent, we might be too late, and we might not be able to avoid undershooting and things going too far the other way.

“It’s always important for them to be proactive,” says Langcake.

The low inflation numbers surprised everyone, which is why so many economists and institutions have revised their cut forecasts for the year.

“Inflation numbers have come in lower than [the RBA] were expecting, so it’s much more likely that [trimmed mean] inflation will head down to their target. They can be much more comfortable cutting,” says Centre for Independent Studies chief economist Dr Peter Tulip.

With the cut, Tulip predicts more confidence in the property market, but a 25 basis point decrease isn’t enough for a radical change.

“One month’s change never makes much difference to house prices, but the outlook for lower rates has been revised down fairly substantially over the rest of this year, and that is putting upward pressure on prices.”

A cash rate cut may bring reprieve to mortgage holders, but in the grand scheme of things, it’s not going to bring enough monetary relief to compensate for the previous 13 rate hikes, says Mozo money expert Rachel Wastell.

“The hype around the rate cut might give borrowers or mortgage holders a bit more confidence that they’ll be saving a lot of money.  But we need to remember that the COVID era of ultra-low rates is probably not returning,” she says.

Wastell estimates that a 25 basis point cut will decrease the monthly repayments of the average loan of $665,978 by roughly $104.

“If you get a whole percentage off, that’s where you’ll see hundreds of dollars [of saving].”

Refinancing will bring more financial relief than any cash rate cut can, she says. 

“By switching to a cheaper rate, you can give yourself almost a percentage break up without waiting for the RPA to move,” Wastell says. “A lot of the successes you can get in your finances are if you make a move first and don’t rely on your lender to do it for you.”