Consensus grows on Q2 2025 rate cut

The consensus is firming amongst market economists and research houses that the earliest Australia can expect a rate cut from the Reserve Bank of Australia (RBA) is the second quarter of next year.

Fitch Ratings has emerged as the latest player to plump for a second quarter 2025 rate cut, with the global firm noting the RBA’s shift towards a more neutral stance, while also noting the central bank’s continuing caution.

A second quarter rate cut will not entirely suit the political needs of the Albanese Government which must go to the polls before the end of May.

In an analysis issued this week, Fitch has been generally positive about the Australian outlook including its ability to deal with a trade conflict between the US and China, but on interest rates it sees no quick loosening.

“A brighter domestic outlook in Australia will help to partially offset any potential hit to net trade from both the slowdown that we expect in China and broader tariff increases,” it said. “Underlying inflation pressures have persisted, and we expect that this will prevent the Reserve Bank of Australia (RBA) from cutting rates until 2Q25.”

“For 2025 and 2026, the outlook is mixed. Domestically, recent data have painted a brighter picture. Employment growth remains strong, with wage growth now outpacing inflation. This, along with tax cuts effective from 1 July and cost-of-living support from the government, should provide some support to consumer spending even as households pull back from using their savings to fund purchases,” the Fitch analysis said.

It said headline inflation has slowed, but much of the decline is due to energy subsidies.

“Services inflation remains sticky and wage disinflation has been slow. But pipeline price pressures have eased and price components of the business surveys, such as the NAB final product prices index, point to trimmed mean inflation falling from 3.5% in 3Q24 towards the middle of the RBA’s 2%-3% target range by mid-2025.”

“These signs of progress have enabled the RBA to shift towards a more neutral stance in its statements. But it remains cautious about starting to loosen policy given the current strength of services inflation and unit labour cost growth. We forecast the first rate cut only in 2Q25 and for the RBA to cut three times next year in 25bp increments. Further rate cuts are likely in 2026, taking the cash rate to 3.1% by the end of the year.”