Westpac brings forward rate cut forecast

It is now the third major bank to bring forward its cash rate reduction call, mirroring Australia and New Zealand Bank (ANZ) and the Commonwealth Bank of Australia (CBA). (National Australia Bank (NAB) has not yet updated its cash rate forecasts following the new CPI data release.)

The change comes following the latest Consumer Price Index findings, which showed that inflation dropped more than expected over the three months to December 2024.

In an economic update on Wednesday (29 January), Westpac’s chief economist, Luci Ellis, commented: “It’s on: the better-than-expected inflation data tips the balance back to the February move we had previously expected. RBA’s view of the economy will need to pivot further.

“Normally it should not come down to one number. This round, however, the CPI has been the deciding factor because the message from other available data has been so mixed.

“With trimmed mean inflation at 0.5 per cent in the quarter (3.2 per cent yr), 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.

Ellis had reflected that the bank’s November 2024 decision to push back the easing cycle start date to May 2025 had maintained that a February move could not be ruled out.

She explained: “It was a matter of what was the most likely outcome, not what the only possible outcome was.”

However, she added that the better-than-expected inflation data “tilts the balance of probabilities back in February’s favour”.

The bank also noted there were “encouraging signs in housing-related inflation”, suggesting that the momentum in domestic price pressures is fading a bit faster than the RBA feared.

“Both rents and home-building costs have decelerated noticeably in recent months, and not just because of government cost-of-living support,” she continued.

The Westpac economist went on to reflect that the labour market has been more resilient than both the bank and the RBA expected (unemployed was at 4 per cent in December quarter, 0.3 percentage points below the RBA’s November forecast), and job vacancies and business surveys have shown that there was no easing in the labour market in the latter half of 2024.

She concluded: “In the end though, the good news on inflation beats the stronger news on the labour market.”

Despite this, Ellis said the bank could not completely rule out that the RBA board would “dig in on their assessment that the demand is still outstripping supply, and keep rates on hold”, but added: “The run of inflation data of late makes such an assessment even harder to justify, though.”

Ellis also noted that while politics does not factor in the central bank’s rate decision, she proffered that the forthcoming change of the make-up of the board “could create some awkward optics around timing”.

The Westpac economist elaborated: “If the current board held rates steady in February and then the revamped board cut rates in April, it would look like the government ‘stacked’ the board to get the desired result.

“This is one of the reasons why we focused on February and May in our assessments. So there is an argument that the current board will opt to get on with it rather than get caught up in the politics of the situation.”

ANZ and CBA recommit to February rate cut call

ANZ and CBA have both reaffirmed their rate cut calls for February, with ANZ senior economist Catherine Birch noting on Wednesday that the trimmed mean annual rate of inflation for December 2024 (3.2 per cent) was below the RBA's forecast (3.4 per cent).

"We think this will be enough for the RBA to cut the cash rate by 25 basis points at its February meeting," she said, adding that the six-month annualised rate of trimmed mean inflation decreased to 2.7 per cent, which is "close to the middle of the RBA’s target band".

She suggested that the central bank would "likely look through headline inflation" figures, due to the impact of federal and state government rebates and cost-of-living relief measures, which she said were providing "temporary [disinflationary] effects".

Like Westpac's Luci Ellis, Birch also noted the "positive signs that housing disinflation will continue into 2025, reflecting the softening market", particularly calling out softening rental inflation and steady construction costs.

CBA's Gareth Aird also stood by the bank's February rate cut call following the release of the December quarter inflation data, stating the CPI print was "materially softer than the RBA had anticipated when it published its latest forecasts in the November Statement on Monetary Policy (SMP)".

He added: "The December quarter 2024 CPI indicated that the disinflation process has gathered momentum, in line with our expectation. The inflation report is overwhelmingly positive and will be welcomed by policymakers in both Government and at the RBA.

"We believe today’s data has given the green light for the RBA to commence normalising the cash rate at the February Board meeting with a 25 basis point rate cut (in line with our base case, which we have held since late October 2024)."

Aird continued: "The downward inflationary ride has been bumpy as observed by the swings in the quarterly changes in underlying inflation. But this is to be expected. The disinflation process is never a smooth one on a quarterly basis.

"The message from today’s data is that the glide path of returning underlying inflation to the target band has gathered steam."

The CBA economist concluded: "Our base case looks for 100 basis points of easing over 2025 that would take the cash rate to 3.35 per cent. This is a touch below the RBA’s estimate of the nominal neutral cash rate, which is centred on a point estimate of 3.5 per cent."

CBA has pencilled in one 25bp rate cut per quarter over 2025.

Other lenders forecasting a rate cut in February include Bendigo Bank and AMP Bank.

Financial markets are now suggesting there is a 92 per cent probability that the RBA will cut rates at the board meeting on 18 February.

[Related: Quarterly inflation data drops further, rate cut hopes rise]