Mozo Money Moves: Experts warn borrowers to be wary of rate cut hype

Welcome back to Mozo Money Moves, your weekly wrap of rate changes and financial insights, keeping you in the loop on what's been happening and how it might impact your wallet.

Across the Mozo database, there’s been very little movement in home loan rates in the start of 2025, and this week Illawarra Credit Union was the only home lender to make a change, cutting 15 bps on its owner occupier variable rates for new home loans. 

Looking at owner-occupier home loans with an 80% LVR making P&I repayments in January, the picture is pretty quiet. Just 8 lenders made variable home loan rate cuts versus 1 digital lender that hiked. In the fixed rate space, 9 providers made fixed rate cuts and there were no hikes. Notably, none of these changes came from the Big Banks.

In the savings space, Mozo has continued to see most rate shifts come through for term deposits, though savings account rates have remained fairly stable. This week, 12 banks cut their term deposit rates, particularly focused on 6, 9 and 12 months terms. 6 cut 6 month rates by 0.12% on average, 6 cut 12 month rates by 0.14% on average, and 5 cut 9 month rates by 0.17% on average. 9 banks also hiked their term deposit rates, 4 of which were Teacher Mutual Bank brands that hiked 7, 8, 10 and 11 month terms by 0.45%.

Given the current stability in both home loan and savings rates, this week we’re taking a slightly different approach to Mozo Money Moves. With all the hype building around a February cash rate cut from the RBA, we wanted to share why we believe the RBA may hold off, despite the overwhelming consensus predicting otherwise.

This week, the latest inflation data for the December Quarter caused some big shifts in expectations about the Reserve Bank of Australia (RBA)’s next move. After the long-awaited release of the Consumer Price Index (CPI) data on Wednesday, the annual trimmed mean inflation read came in at 3.2%, with a 0.5% increase over the quarter. 

While this marks a positive step toward inflation control, it’s still not quite in the RBA's 2-3% target range. But is it sustainable at 3.2%? That's where things get interesting.

Before the CPI numbers were released, the expectation was that the RBA would likely hold its ground on interest rates for the time being, especially given that inflation remained above target. However, by the end of the week, the ASX RBA Rate Tracker had shifted from an 84% chance of a rate cut in February to a 95% chance—and it wasn’t just the markets reacting. 

After the CPI announcement, two Big Four Banks also adjusted their forecasts, with NAB and Westpac shifting their May 2025 rate cut predictions to February 2025. 

Westpac’s Reversal on Rate Cuts

In a surprising move, Westpac revised its forecast on Wednesday after the CPI data was released, to suggest the RBA could indeed cut rates in February,

Chief Economist Luci Ellis claimed that “the good news on inflation outweighs the stronger news on the labour market, and that Westpac has “just enough evidence to conclude that disinflation has proceeded faster than the RBA expected.”

Ellis further went on to explain that if the RBA waited to cut rates until April, it might seem like the government “stacked” the board to get a more favourable outcome and was one of the key reasons why Westpac moved to February in its predictions.

But should politics come into play when the RBA is an independent body?

NAB Joins the Rate-Cut Party

On Thursday, NAB followed suit, revising their forecast to February, highlighting that “the Q4 CPI confirms that inflation has moderated more quickly than the RBA expected.”

NAB went on to explain that while labour market conditions remain strong, they don’t see these conditions as inflationary at this stage, and that the RBA’s communication shift in December, combined with softer-than-expected CPI data and a positive outlook for housing inflation, made it clear that a rate cut in February is on the table.

Commbank and ANZ were already firmly expecting a rate cut in February, even before the CPI data dropped, so all Big Four banks are now predicting a February rate cut.

The CPI data released last week showed some promising signs of inflation moderation, but Mozo experts remain cautious about the growing hype surrounding a February rate cut. 

While the headline CPI marked the lowest recorded since December 2021 (rising 2.4%, down from 2.8% in the September quarter), as Mozo’s Rachel Wastell points out, the RBA is typically more concerned with underlying inflation (the trimmed mean figure) which came in at 3.2%. 

This figure is still well above the RBA’s target range of 2-3%, and as the RBA noted in its December cash rate decision statement: "Measures of underlying inflation are around 3½ per cent, which is still some way from the 2.5 per cent midpoint of the inflation target."

The labour market remains a significant factor in the RBA’s decision-making process. Despite a slight uptick in the unemployment rate to 4.0% in December 2024, it’s still at a very low level compared to historical standards, and actually slightly lower now than January  2024. 

The tightness in the labour market—with a workforce still experiencing high demand for workers—means that inflationary pressures could persist, even as other indicators show improvement. As Bullock has said previously, a 4.5% unemployment rate is likely to be the sustainable balance point, however she also said this does come with a considerable amount of uncertainty.

“As RBA Governor Michele Bullock has previously pointed out, the labour market is a critical consideration in determining when it will be safe to cut rates,” says Wastell. 

“While many economists and the market are betting on a rate cut in February, there’s a real chance the RBA will need to see the trimmed mean inflation figure start with 2 and unemployment closer to 4.5% before they pull the trigger.”

It’s also important to keep in mind the role of government subsidies in keeping headline inflation lower than it would be otherwise. Government subsidies provided across Australia for essential costs like transport, electricity, and childcare have been acting as a buffer against rising costs, which is in some way masking the true level of inflation. In fact Mozo recently dived into the way electricity rebates are masking high prices in its latest Energy Report.

On Wednesday, the CPI showed a sharp fall in electricity prices—a 9.9% drop and the second largest quarterly fall on record, which helped to decelerate the housing component (-0.7%) of the CPI basket. Similarly, subsidies such as the 50 cent per journey offer on TransLink in Queensland and free summer transport journeys in WA are likely keeping transport costs in check, as transport also fell 0.7%.

Even in childcare, where the impact of subsidies is a little more complex, asa correction from the ABS meant that the CPI quarterly movement was 0.05 percentage points lower than it would have been otherwise, are impacting the trimmed mean. This correction has actually caused the trimmed mean figure to decrease by 0.03% more than it would have without the correction.

"Government subsidies for transport, electricity, rent, and childcare are keeping a lid on headline inflation," says Wastell. "But if you take those cost of living relief measures away, which could well be the case on July 1, we might end up seeing a very different story."

As the markets continue to bet on a February rate cut, Mozo is urging borrowers to remain cautious, and not count their chickens before they hatch. 

"I feel it’s unlikely the RBA will make a cut at the first meeting of 2025, but of course, there's always the possibility. With many economists and the market betting on a rate cut, it would be naive to rule it out completely,” she says. 

“That being said, we also have to remember that banks and markets have a vested interest in the 'cut hype.' When people start to believe a rate cut is on the horizon, it can create a ripple effect—borrowers may feel more comfortable taking on debt, and consumers might be more inclined to loosen their purse strings and spend, which ultimately drives economic activity.” 

“The risk here is that a cut too early could fuel demand before inflation is fully under control, which is what the RBA will want to avoid."

The key for borrowers, Wastell says, is to be cautious and avoid getting caught up in the hype. 

“While talk of potential rate cuts is tempting, it’s important not to overestimate how soon they’ll happen or how much of an impact they’ll have,” says Wastell.

“Rather than relying on future rate cuts, it might be worth considering locking in a fixed rate for a couple of years or splitting your loan to combine the stability of fixed rates with the flexibility of variable rates.’

It’s also a great time to look beyond the Big Four banks. Looking at the APRA data on home lending out today , Commonwealth Bank (25%), Westpac (21%), NAB (14%), and ANZ (13%) make up a combined 73% of the home loan market for owner-occupiers (excluding non-bank lenders and their % of loans held). 

Yet, on the Mozo database the average advertised variable rate from the Big Four is 7.15%. Looking at rates across all lenders that average rate drops to 6.71% and excluding those Big Four it drops to 6.69% (paying principal and interest on a $500k home loan with an LVR of 80% over 25 years as of 31 January 2025). 

Big Four Banks Domination

“Despite their dominant market share, there’s plenty of competition from smaller banks, as well as banks just outside those top four spots, for borrowers who still like bigger banks.”

“Smaller lenders can often have more competitive rates than the Big Four, which can be a great opportunity for close to three quarters of the owner occupier home loan market.”

While many economists are forecasting up to 1.25% worth of cuts over the next one or two years, rates are not likely to return to the historical lows we saw during the COVID era. Even with five potential cuts across two years, rates could still remain above 5%.

While the market may not see drastic changes in the immediate future, locking in a fixed rate now could offer some potential for savings, as the average fixed rates sit much lower than the average variable, with leading rates around 5 and half percent on the Mozo database. 

Average Fixed Rates

Based on an owner occupier $500k home loan with an LVR of 80% over 25 years, making principal and interest on a  as of 31 January 2025.

• Fixed 1 Year: 6.23% p.a.
• Fixed 2 Year: 6.05% p.a.
• Fixed 3 Year: 6.01% p.a.

Leading 1 Year Fixed Rates

Leading 2 Year Fixed Rates

As a part of Mozo’s commitment to making your money count for more, each month we “roundup” the rate changes, key banking trends and money moves in the Australian personal finance market. 

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