'Very weak': Warren Hogan dismisses RBA rate cut case

Top economist Warren Hogan has labelled the case for a February rate cut "very weak" and warned such a move risks embarrassing the Reserve Bank if it's forced to raise rates later this year to offset renewed inflation.

However, interest rate futures markets and the vast majority of retail bank economists think a 25 basis point cut on February 18 is all but a done deal, after December quarter headline inflation cooled to a softer-than-expected 2.4 per cent. 

Trimmed mean inflation - backing out volatile items - eased to 3.2 per cent at 0.2 per below the RBA's November forecast of 3.4 per cent. 

"But I would argue a cut is dangerous and bad policy," said Mr Hogan. "The RBA will be thinking about where inflation will be in 2026 and the slightly-softer-than-expected CPI [inflation] number heavily affected by subsidies won't give the RBA more confidence on that."

The RBA's mandate to target full employment and inflation between 2 and 3 per cent has many other economists arguing trimmed mean inflation will fall below the target range by the June quarter to justify a rate cut this month.

Commonwealth Bank's economics team expects four 25 basis points in 2025 to take rates from 4.35 per cent to 3.35 per cent, with National Australia Bank also forecasting four rate cuts this year and another in the first quarter of 2026 to take rates as low as 3.1 per cent.

The Melbourne-headquartered lender has already cut its interest rates on fixed two-year home loans 15 basis points to 5.89 per cent, with other big banks tipped to follow suit. 

Politics of rate cut are 'diabolical'

However, Mr Hogan insists under pressure households shouldn't expect anything like the scale of rate relief the market is pricing, as Australia's jobs market is strong and strength in December quarter retail sales actually hinted at a cyclical upswing in the economy. 

"The first thing is that inflation is higher right now than what the CPI numbers suggested," he warned. "You have to take out the government's [energy bill] subsidies and volatile items. The underlying pulse of inflation is still around 3.25 per cent.

"So it's heading in the right direction, but it's not at all clear it's going to keep doing that when you have a cyclical recovery in the economy.

"Incomes are starting to grow again and we're getting evidence people are spending more.

"The risk is they do a rate cut just before the election, then in a few months' time have to put rates up. It will do their credibility and the politics of it all is diabolical."

The central bank hands down its hotly-anticipated decision in just 11 days' time.