Is a February rate cut from the RBA back on the table? There is hope

Mortgage holders hopefully of a February rate cut are a little more hopeful than they were a week ago, but how hopeful should they be?

Their fears of a rate hike have all but disappeared, although they don’t know when they will see rate cuts. Rates are at 4.35% and have been for more than a year, following 18 months of hikes from 0.1%.

The first rate cut will be a big boost for the Australian economy and consumer confidence, but when will it happen? Obviously not before February because the RBA won’t meet again until then. But will a rate cut happen at that point, or later in the year? The bank has left the population on the edge.

The hope of a February rate cut

Australia recorded its weakest annual growth in decades, except during the pandemic, during the September quarter. Inflation is now back in the RBA’s range. The bank’s comments that it was ‘not ruling anything in or out’ provides hope too. On the other hand, that neither rules out the prospect of future rate hikes. Moreover, the RBA reiterated that it only saw a return of inflation to the midpoint of its target until 2026.

All things considered, the bank said enough for investors to be hopeful of a February rate cut, because for the first time, it acknowledged that its actions were having an impact. It observed the slow level of growth, the declines in real disposable income and its weighing on household consumptions and labour market conditions were easing.

‘Taking account of recent data, the Board’s assessment is that monetary policy remains restrictive and is working as anticipated,’ it said.

‘Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close’.

Ultimately it said that,’ Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority’.

‘The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market’.

‘The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome’.

At the media conference, Governor Michelle Bullock said,’ I honestly don’t know if we’re going to be cutting in February’.

Relief is coming

But all things considered, this was the clearest indication that relief was coming, as it acknowledged the impacts of inflation. Bullock said the change in language was ‘deliberate’ and she has clearly abandoned the idea that the bank needed two ‘good’ quarterly inflation reports before cutting the cash rate.

Bond traders are now betting rate cuts are coming sooner. They now price in a two-in-three chance of rate cuts in February, whereas it had been a one-in-two chance a week earlier. Markets are fully priced in for a move during or before April, and have priced in two cuts during or before May.

Obviously the question of how many rate cuts is another question, and one for another article. But we always knew they were coming, and there is now a good chance of a February rate cut when the board next meets, on the 18th of that month.

Ultimately it is no guarantee that a February rate cut will happen, and economic data before then could suddenly cause the RBA to change course (maybe even hike rates). But we can say with certainty that there’s a better chance of it happening now than just a week ago.

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