The National Australia Bank (NAB) has revised its rate cut forecasts, joining other major banks in expecting a February rate cut. This shift aligns with predictions from Commonwealth Bank, ANZ, and Westpac, all of which foresee a reduction in the Reserve Bank of Australia’s (RBA) cash rate following recent inflation data.

Inflation Trends Signal Possible Rate Reductions

According to the Australian Bureau of Statistics (ABS), inflation has been trending downward, with the December quarter recording a modest 0.2% increase.

This marks the lowest semi-annual rise since the COVID-19 pandemic, reinforcing the likelihood that the RBA will lower interest rates to keep inflation within its target range of 2-3%.

On a six-month annualized basis, underlying inflation stands at 2.7%, about a third of its peak, and within the RBA’s target range for the first time since 2021.

Trimmed mean inflation fell to 3.2% over the year to the December quarter, down from 3.6%.

In the latest quarter, trimmed mean inflation nearly halved to 0.5%, making it a third of what it was at the time of the election.

For the first time in three years, annual trimmed mean inflation in the monthly indicator is within the RBA’s target range, reaching 2.7% in the year to December.

Headline inflation rose by just 0.2% in the December quarter, bringing the annual increase to 2.4%—around a quarter of its peak.

Australia’s headline inflation is now lower than in most major advanced economies, including the United States, United Kingdom, and Germany.

SQM Research highlighted that core inflation rose just 0.5% for the quarter, putting the RBA at risk of undershooting its inflation target. This has led to growing expectations that the RBA will implement a 0.25% rate cut on February 18, with the potential for additional cuts in April.

Major Banks Align on Rate Cut Forecasts

NAB is the last of the big four banks to revise its rate cut forecasts, joining ANZ, Commonwealth Bank (CBA), and Westpac, which updated its prediction for a February 2025 cut on January 29.

Despite this shift, NAB’s group chief economist, Alan Oster, emphasized that the rate-cutting cycle would likely be “gradual,” with the RBA expected to lower the cash rate to 3.1% by February 2026.

“The Q4 CPI confirms that inflation has moderated more quickly than the RBA expected and sets up a likely downward revision to the inflation profile in the Feb SMP. This now makes February the most likely starting point for a gradual easing in interest rates,” Oster said.

Following the release of new CPI data, both ANZ and CBA reaffirmed their predictions for a February rate cut. ANZ senior economist Catherine Birch noted on Wednesday that the trimmed mean annual inflation rate for December 2024 (3.2%) came in lower than the RBA’s forecast of 3.4%.

After revising its own rate cut outlook, Westpac’s chief economist, Luci Ellis, stated: “It’s on: the better-than-expected inflation data tips the balance back to the February move we had previously expected. The RBA’s view of the economy will need to pivot further.”

Other lenders, including Bendigo Bank and AMP Bank, are also forecasting a February rate cut.

Meanwhile, financial markets now indicate a 95% probability that the RBA will lower rates at its board meeting on February 18.

Impact on the Housing Market

A February rate cut is expected to significantly influence Australia’s housing market. Lower interest rates will reduce borrowing costs, making mortgages more affordable and potentially stimulating property demand.

SQM Research’s Scenario 3 predicts a strong housing market recovery, particularly in Sydney and Melbourne, where auction clearance rates could rise as early as February. Home prices in these cities may begin increasing by the June quarter, driven by renewed buyer confidence and improved affordability.

With the RBA expected to lower rates, the national housing market is likely to experience positive adjustments. If rate cuts occur as predicted, buyer confidence should strengthen, leading to increased property transactions and price stability in key markets.

Final Thoughts

NAB’s revised forecast aligns with a broader consensus that the RBA is poised to implement rate cuts in February. These adjustments are expected to ease mortgage pressures, boost housing market activity, and create new opportunities for buyers and investors. With inflation moderating and economic conditions stabilizing, the upcoming months will be critical for Australia’s financial and real estate sectors.

Ready to take advantage of the upcoming rate cuts? Contact Loan Nerds today to explore your options and find the best solution for your mortgage needs! Our team is here to help you navigate the changes and secure the right loan for your future.