Will the RBA cut rates in February? 3 reasons why they might and 3 reasons why they might not!

Will the RBA cut rates in February? That’s the question on everyone’s minds. The board will hold its first meeting for the year on February 17-18 and everyone wants to know if a rate cut will happen. Only time will tell. There are also some important metrics to be released in the next month including headline inflation figures. Let’s take a look at the factors in favour of rate cuts, and those against.

Will the RBA cut rates in February? 3 reasons why

1. Inflation is falling

Yes it is. Inflation was 2.3% over the 12 months to the end of November 2024. Even the RBA’s preferred measure of trimmed mean inflation (which eliminates the most volatile price changes) fell from 3.5% to 3.2%. And crucially, services inflation is falling particularly – from 4.8% to 4.2%. The RBA’s objective is for inflation to be 2-3% and although it would not ordinarily cut rates unless it was way below that range – its 13 consecutive hikes were meant to bring inflation ‘back to normal’ and it is working (even if consumers are hurting).

2. Traders expect it

According to Bloomberg, markets are pricing in a 75% chance of a February rate cut and LSEG is pricing in a 60% chance. Prior to the most recent data, these figures were 66% and 50%. Traders wouldn’t be doing this unless they were confident there’d be a rate cut. And they are confident on the basis of that data. Moreover, several individual economists and analysts are publicly predicting a rate cut or are calling for it.

3. The economy needs a shot of confidence

The economy is barely growing with 0.8% growth in the first three quarters of 2024. It was 3.1% in the USA. Moreover, Australia would’ve been lower if it was not for immigration – per capita growth has been negative for seven quarters. Real wages are 4.8% below pre-pandemic levels and Australia’s lack of 30-year mortgages mean the brunt of rate hikes have been felt particularly hard.

A rate cut in February would be a boost for the economy. Keeping rates on hold would be bad for confidence, but would also lead to Australia falling behind comparable jurisdictions that have begun their rate reduction cycle already.

Will the RBA cut rates in February? 3 reasons why not

1. The labour market remains resilient/tight

Unemployment remains low at 3.9% as of the last ABS survey. Moreover, Indeed Australia-Pacific economist Callam Pickering told the ABC that the number of unemployed people per job vacancy (which is 1.7) is well below pre-pandemic levels. So what you might say? Well, wages will keep rising and inflation will be kept above the RBA’s target. As well as this, the impact of any rate cuts will cause inflation to rise again.

2. Governments keep spending

The key reason the economy has held up in spite of such rapid income declines, other than immigration, is government spending which is showing no signs of showing down. In the June quarter, when GDP growth was 0.2%, it was spending that kept growth from being negative. Just look at long-term pay rises that state governments are locking in with public sector workers – some of which are not even budgeted for. And spending in official statistics does not even include interest payments on debt and welfare payments, which would be a big share of government spending – although it does include the $49bn NDIS.

3. Inflation could still remain higher

The December inflation figures could be inflated due to the Black Friday/Christmas sales. Arguably consumers who have kept spending in check for the year may have come out and spend – thus fuelling inflation. This could be enough for the RBA to avoid a rate cut in February. Moreover, the IMF has recently warned that inflation may not return sustainably to the RBA’s target range only by the end of 2025. Rising inflation in December could lead to a rate cut being postponed for at least one RBA meeting.

What are the Best ASX stocks to invest in right now?

Check our buy/sell tips