For a year when interest rates have remained on hold, 2024 has been a very interesting year for interest rates indeed—but what about 2025?

The Big Question—Are we going to get any interest rate cuts in 2025? 

I think the answer is yes, but when, is the bigger question!

We all now know that for interest rates to be cut we need inflation lower. So what will it take for this to occur?

1. Continued restrictive interest rate policy settings currently in place. The RBA hopes that restrictive policy will eventually run down inflation to its target range of 2%-3%
2. Further material slowing of Australia’s economy beyond its present day very weak state.
3. The economy is on life support—we have had 7 quarters of negative GDP (per capita). 

Trimmed mean inflation is a significant driver for interest rate cuts

The RBA Governor has consistently stated that she needs to see inflation sustainability lower before she would be comfortable in reducing interest rates. To confirm sustainability she will want to see at least 2 quarters of trimmed mean inflation between 2%-3% before cutting. 

The next quarterly inflation releases are due on the 29 January 2025 and 30 April 2025. 

Last quarter’s trimmed mean inflation was 3.5%. Given this, the earliest we are likely to see a cut is at the May 2025 RBA board meeting. If inflation doesn’t meet the RBA’s inflation mark on 29 January 2025, it is likely that interest rate cuts will be pushed into the second half of 2025.

Our economy is on life support

It will be very interesting to see how the economy performs in the next 6 months. Were it not for government spending and migration over the last year, unemployment would be higher and we would surely be close to a recession by now. 

Ms Bullock told a Sydney audience. “If it wasn’t there, (government spending), if it wasn’t filling that gap, then things might well be much worse in terms of the employment market,” 

If the RBA sees our weakened economy worsening, then the RBA may cut interest rates in anticipation of inflation falling to its target range as a consequence.

2025 is another interesting year to come

There’s a number of big time events and factors that will impact interest rates in 2025. 

1. Australia has a federal election. It’s clear that to support the Labor Party’s re-election chances, it will continue spending and supporting the economy leading up to the election. However what happens after the election when the winner has 3 electoral years up their sleeve, is anyone’s guess.

2. The USA will inaugurate Mr Trump along with his threat of significant tariffs. One thing is for sure with Mr Trump in power, the status quo will not prevail. Already we have seen our $AUD weaken with the belief that his policies will be inflationary and require interest rates to be raised. This has taken the $USD higher and the AUD lower—great for our exporters.

3. China’s economy is the weakest it has been for many decades. China’s property market, a cornerstone of growth for their economy, is in a serious slump. With 35% of Australia’s exports going to China it is clear that Australia’s revenues and fortunes going forward will be impacted. 

Let’s see!