How will Australia's economy react to cuts?
The Reserve Bank of Australia (RBA) is anticipated to reduce the cash rate by 25 basis points at its board meeting scheduled for 17-18 February 2025.
This would bring the rate down to 4.10%, as analysts foresee only a shallow easing cycle comprising two rate cuts in total.
Key factors influencing this outlook include a stronger-than-expected labour market and signs of a recovery in consumer spending. However, inflation has moderated faster than previously forecast.
ANZ’s head of Australian economics Adan Boyton said that while the statement following the meeting may not reflect a dovish tone, it will likely weigh these developments.
Updated projections for Australia’s GDP indicate a growth of 2.4% in 2025, an upward revision from the previous estimate of 2.2%.
According to Boyton, this growth reflects a strengthening economic backdrop and improved activity indicators. The unemployment rate is expected to peak at 4.2% in the second quarter of 2025, remaining below earlier expectations due to stabilising labour market trends. Wage growth is projected to ease throughout the year, reducing the risk of wage-driven inflation.
In housing, prices are forecast to experience a modest recovery in the latter half of 2025 after continued declines earlier in the year. Capital city housing prices are expected to increase by 0.9%, while Sydney and Melbourne are projected to see declines of 1.1% and 0.9%, respectively. ANZ projects a more significant rebound in 2026, with housing prices anticipated to rise by 3.8%.
Private sector credit growth is expected to slow from 6.3% in 2024 to 5.5% in 2025, before recovering to 6.1% in 2026. Boyton attributed this to shifting economic conditions and a gradual adjustment in borrowing trends.
With wage growth steadying and employment levels improving, broader economic indicators suggest a balanced but cautious outlook. Market participants will closely monitor the RBA’s upcoming decision and the potential implications for inflation, housing, and credit markets.
What do you think about the RBA’s potential rate cut and its projected impact on the Australian economy? Share your thoughts below.
