Forget RBA hikes! Market now pricing 3 interest rate cuts by Christmas 2025

No doubt by now you’ve heard of the better-than-expected June Consumer Price Inflation (CPI) report that was released on Wednesday. The Australian stock market surged to a new high, and both existing and aspiring mortgage holders breathed a sigh of relief – as most economists are now calling the RBA will stand pat when it meets to decide on its official cash rate on Tuesday next week.

That’s the key takeaway, a steady cash rate rather than a higher cash rate is good for stocks and good for the economy, because in both cases it supports consumer spending and reduces borrowing costs. It also helps support employment, and that has further positive knock-on effects across the board.

It is a big deal.

But, it gets even better. As we’ll see below, not only have markets completely factored out any possibility of further RBA rate hikes, but they’re also now factoring in as many as three 0.25% cuts by December next year.

As you will probably know from reading my regular updates on this topic – market pricing can and usually does change quickly. But for now, let’s bask in the warm afterglow of what June’s CPI has delivered!

Prior to the CPI data, the market was pricing a peak in the RBA cash rate of around 4.425% in October. Doing the maths, this equates to roughly a 30% probability of the RBA hiking interest rates by its typical 0.25% move by then. This is significantly down from a 48% probability by November as priced after our last update that followed the release of the May monthly CPI data.

Note the RBA places far more importance on the quarterly CPI data than the monthly data because it is considerably more comprehensive. This is why many were tipping that a poor result in the June quarter’s data would push them over the edge for a hike at their August meeting. Similarly, if it wasn’t going to be August, the market’s hunch was a hike in November following the release of the September CPI data in late-October.

It would be foolish to rule anything out – the RBA’s preferred Trimmed Mean CPI (that strips out the volatile components of the inflation basket) has been known to jump around. But given the light blue bars in our Cash Rate Futures Implied Yield Curve all fall below the current 4.35% cash rate level – it appears the market is now satisfied the RBA will not hike rates again.

So, naturally, we can start to calculate the probabilities and timings of potential interest rate cuts. Before the June quarter CPI data, the market was factoring in the first RBA 0.25% cut to occur in July next year, with a second cut squeaking in by December. To work this out, consider where the dark blue bars in the Yield Curve chart first dip below 4.10% and 3.85% respectively.

Checking the current situation, we can see that the light blue bars in the Yield Curve chart first dip below 4.10% in March 2025, and below 3.85% in June 2025. But as they say in the TV infomercials, “Wait, there’s more!”. A third interest rate cut is now slated to occur in December 2025.

Compare this to our last update on June 27 where the Yield Curve chart was predicting only one interest rate cut in November 2025, and we can see just how far Australian interest rate expectations have swung in a very short space of time.

The prospect of three interest rate cuts by December next year is tantalising. But, before you finalise that Christmas 2025 wish list, keep in mind it would only take one CPI shocker – possibly the July monthly print due on August 28, or more likely the September quarter print due on October 30, to shake up the Christmas tree again!

This articles first appeared on Market Index on Thursday 1 August 2024.