I feel I am swimming against a considerably strong riptide of opinion. My call for Tuesday 18 February 2025 RBA interest rate decision is that the RBA will keep interest rates on hold at 4.35%.

I concede that it’s a close 50/50 call as conditions for a cut have narrowed considerably. It’s important to remember that the RBA still considers inflation to be enemy number 1. The biggest risk to the RBA would be to cut rates now and have to raise them later in the year.

Even if they do cut it’s possible it will only be a 0.10% to 4.25%. This would be a cut without having a tangible cut.

The reasons for why I believe the RBA won’t cut in February are;

• Trimmed mean inflation is still too high – The RBA’s preferred trimmed mean inflation measure is still above 3%. While the recent quarterly inflation number confirmed annualised headline inflation at 2.4%, trimmed mean inflation came in at 3.2%. Trimmed mean inflation strips out volatile items and government subsidies such as electricity to give a truer underlying picture of inflation.

• Unemployment is still too low – The economy continues to generate an incredible amount of jobs (albeit many in the government paid care sector) which is reflected in the continuing low rate of unemployment at 4%. It seems counterintuitive that an economy with a consistently low 4% unemployment rate would require an interest rate cut.

• Sustainably low inflation – The RBA considers inflation to be the biggest scourge on our economy. They have constantly stated that they will not give up the fight until they know they have inflation beaten and firmly under control. Additionally, the RBA has constantly stated that it needs to see inflation sustainably lower before they would consider cutting. The RBA may want to see another quarter’s lower inflation, due 30 April 2025, before cutting.

• Trump’s tariff agenda – Mr Trump has imposed a 25% tariff on Canada and Mexico and a 10% tariff on China. He’s also threatening Europe. He is yet to decalre what other alternate policies he has up his sleeve. How tariffs impact the global and Australian economy and inflation is yet to be understood. Would it make sense for the RBA to sit tight for a few more months on interest rates until the Trump picture becomes clearer?

• The Aussie dollar – The $AUD recently slipped to a 5 year low against the $USD at 0.6087. It currently sits at 0.6270. This has come about due to a weak Chinese economy (the $AUD is considered a proxy currency for China) and a strong $USD driven by Interest rate differentials between the USA and Australia. An RBA interest rate cut could lead to a lower $AUD possibly below 0.6000 making imports more expensive and ultimately adding to inflation.

• Federal Election – With a Federal election due any time before 17 May 2025, any interest rate decision the RBA makes whether it holds or cuts will be considered political. For example a cut will be jumped upon by Labor as proof that their policies have worked to lower inflation and reduce cost of living pressures.

• Troubling USA inflation –  Last Wednesday’s USA inflation number came in at troubling 0.5% for the month and 3.1% for the year. The USA has a 2% inflation target. This hot inflation print indicates that price pressures in the USA continue beneath the surface. It would make sense for the RBA to want to watch developments in USA inflation for a little longer before considering cutting.

Here are a few reasons why the RBA might cut rates;

• Australia’s economy is weak – 7 quarters of negative per-capitata GDP speaks for itself.
• China’s economy is weak – with 35% of our product going to China, when China is weak Australia suffers.
• Recent trimmed mean CPI – If we look at just the last 2 quarters of Australian CPI data, the trimmed mean CPI comes in at 2.7% —well within the RBA’s 2% to 3% band. 
• Interest rate impact delay – it takes at least 6 to 9 months for any movement in interest rates to properly flow through the economy and make an impact. If the RBA believes the economy is going to considerably weaken further from here then it needs to start cutting now.
• RBA cut and the political impact – If they cut now with an Federal election several months away it will set the stage for possible future cuts with less political impact.

Let’s see!

Please Note – all of the thoughts and ideas expressed in this Bordez Commentary are my own and not with assistance from artificial intelligence (AI)