Why the Australian Central Bank Won’t Cut Rates so Many Times in 2025?

TradingKey - On February 18 (Tuesday), the Reserve Bank of Australia (RBA) announced its interest rate decision for February. In line with market expectations and our forecasts, the RBA decided to cut interest rates by 25 basis points, reducing the policy rate from 4.35% to 4.1%. This marks the first rate cut since the end of the tightening cycle from May 2022 to November 2023.

The Australian economy has significantly slowed down over the past couple of years due to the extended period of rate hikes followed by high interest rates. With inflation broadly declining, the primary aim of this rate cut is to stimulate economic growth. Moreover, as the four major commercial banks in Australia are expected to follow suit with rate reductions, mortgage pressures will ease, which should boost consumer spending in the household sector.

We anticipate that this rate cut will have a notable stimulative effect on the economy. Coupled with recent high-frequency data indicating signs of recovery in the Australian economy, we expect the RBA to cut rates by between 50 to 75 basis points throughout this year, which is significantly less than the 100 to 125 basis points predicted by dovish economists. Typically, policy rates and the AUD exchange rate have a positive correlation; however, given that the anticipated extent of this easing cycle is less than current market expectations, we believe the impact on the AUD exchange rate will be limited.