How much, and when the RBA will cut interest rates in 2025

The Reserve Bank of Australia (“RBA”) concluded its December 2024 meeting by maintaining its official cash rate (“OCR”) at 4.35%, marking the ninth consecutive meeting and the thirteenth consecutive month at this level. This was not the headline, however – this is exactly what the market expected.

Despite the seemingly benign outcome, there were some massive moves in markets post-meeting, and equally large changes in the expectations surrounding the timing and magnitude of RBA interest rate cuts in 2025. A picture tells a thousand words, so let’s check out some of the moves the decision triggered across markets in charts:

Exhibit 1: Massive plunge in key risk-free market yield benchmarks

The benchmark for short term Australian government bond yields, the 2-Year bond, fell by 12 basis points to 3.77%. Markets effectively delivered half a typical interest rate cut (i.e., 0.25%) immediately following the December Board meeting.

Exhibit 2: Big drop in the Australian dollar

The Australian dollar fell 1%, reaching approximately 63.75 US cents, its lowest level in over a year. Currency values are all about relative risk-free returns across countries. If markets anticipate they will earn a lesser yield in Australia (because of increased official interest rate cuts) compared to the USA, they will sell down the Australian dollar in favour of the higher yielding US dollar.

Exhibit 3: Dip and draw in the Implied Yield Curve

The ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve is a market proxy for the RBA’s OCR. The Yield Curve provides investors with a graphical representation of where the market is predicting the OCR will be down the track.

I have overlaid the December 10 Yield curve (light blue bars) over the December 9 curve (dark blue bars) to illustrate the change in market expectations for the timing and magnitude of RBA interest rate cuts both before and after the December Board meeting. I’ve also drawn on the schedule levels equating to the next 1.0% of 0.25% cuts.

Generally, the market has lowered its expected level of the OCR through the 18 month look-forward period. Where the light blue bars touch an interest rate cut level tells you when the market has fully factored in the relevant cut.

In terms of first cut timing, the curve has experienced the following notable changes:

• The next RBA meeting is 5-6 February, the chance of an interest rate cut at this meeting has increased from 28% to 34%
• March meeting cut probabilities increased from 60% to 72%
• There is no meeting in April, but this is when the market is factoring the first rate cut (interpret this as hedging their bets between the March and May meetings!) The interesting item here is that the probability of a larger, 0.5% cut, increased from just 6% to 28%.
• The second 0.25% rate cut has moved in from July to June.
• The third 0.25% rate cut has moved in from December to September.
• There was no fourth 0.25% rate cut in the Yield Curve’s look forward period ending May 2026, but there’s now a 98% probability it will occur in that month

In summary, markets believe the first RBA interest rate cut is a lock by May next year, but the probability of a surprise March cut has increased. Mortgage holders are still likely to get three 0.25% cuts in 2025, but they are likely to occur three months earlier by September. There is now a fourth cut in the mix by May 2026.

Why did markets react so vigorously to the December RBA meeting?

Here are the key takeaways from the December meeting statement and post-meeting press conference by Governor Michelle Bullock that caused the market to pivot so substantially:

Statement