These 5 charts show why the RBA may hold rates in February, despite cut forecasts

There are a number of factors affecting the Reserve Bank of Australia's (RBA) cash rate decisions – which, in turn, impact interest rates. Some stats hold more weight than others, depending on the economic climate. In 2025, the key economic indicators listed below are among the most significant data points that influence monetary policy.

Here’s how the RBA explains its approach to setting monetary policy :

“The Board takes into consideration a wide range of factors, including domestic and international economic and financial conditions, along with the outlook for economic growth and inflation in Australia.”

We explore each indicator in detail to determine the likelihood that the RBA will lower, hold or raise the official cash rate. You’ll also find a summary conclusion at the end of every section.

The latest Consumer Price Index (CPI) from the Australian Bureau of Statistics (ABS) shows inflation continues to soften. In the December 2024 quarter, headline inflation rose by 0.2%, maintaining the same modest increase observed in the September quarter. Annually, inflation decelerated to 2.4%, down from 2.8% in the previous quarter – the lowest rise since June 2020.

This easing brings the annual rate of inflation comfortably within the RBA’s target band of 2-3%. 

The trimmed mean – a key measure of core or underlying inflation – rose by just 0.5% in the final quarter of 2024, with the annual pace slowing to 3.2%, beating market expectations of 3.3%. This result was also the lowest recorded rate since December 2021.

These figures point to a consistent reduction in both headline and core inflation over the past six months, aligning with the RBA’s wish to see a "sustained period" of moderating inflation.

Despite the deceleration, annual services inflation was 4.3% in the December quarter. While this marks a slight improvement on the previous quarter, services inflation remains stubbornly sticky – highlighting ongoing price pressures in key sectors like housing, health, and insurance.

Discretionary spending in Australia rose for the third consecutive month in December (0.4%), showing strong consumer demand for goods and services like travel and dining. Persistent spending may signal ongoing inflationary pressure, which could prompt the RBA to consider whether further rate hikes are needed to curb inflation.

Since September 2024, the United States has trimmed 100 basis points from the federal funds rate. At a recent press conference , US Federal Reserve chair Jerome Powell said he won’t rush further rate cuts after inflation rose from 2.4% in September to 2.9% in December. The RBA often considers global economic trends, particularly those in the US, when shaping its own decisions.

Most crucially, the key inflation metric the bank tracks – underlying inflation – remains above the RBA’s target band, undermining chances of a February rate cut as price pressures persist.

The latest ABS national accounts estimates revealed that Gross Domestic Product (GDP) expanded 0.3% quarter-on-quarter in September 2024, following a rise of just 0.2% in June. 

“The Australian economy grew for the twelfth quarter in a row, but has continued to slow since September 2023,” ABS head of national accounts Katherine Keenan said.

This report was released in December 2024 and the next quarterly estimates for Q4 2024 won’t be available until 5 March – a few weeks after the RBA’s February cash rate decision.

While the economy continues to expand, growth remains sluggish, raising questions about whether the cash rate is too restrictive. Household spending has been under pressure from high interest rates and cost-of-living strains, while business investment has shown signs of cooling.

Last month Al Jazeera reported that if it weren't for immigration-driven population gains, Australia may be in a recession now, given seven straight quarters of negative per capita growth.

However, weak economic growth alone isn’t enough for an immediate rate cut. The RBA may prefer to wait for more labour market data and the March GDP release before making a move.

ABS labour force data shows that the seasonally adjusted unemployment rate rose to 4.0% in December. The result was a slight increase on the 3.9% figure reported in November.

“With employment rising by 56,000 people and the number of unemployed increasing by 10,000 people, the unemployment rate rose to 4.0%,” ABS head of labour statistics Bjorn Jarvis said.

The participation rate hit a record 67.1%, leading to a rise in the employment-to-population ratio to 64.5%. Underemployment fell to 6% in December, its lowest level since February 2023.

Despite the slight rise in the unemployment rate, Australia's jobs market remains resilient – underscored by the fact that the RBA projected unemployment to reach 4.3% by the end of 2024.

This could deter the Reserve Bank from cutting interest rates in February.

However, professional services firm KPMG’s latest economic outlook forecast anticipates Australia’s unemployment rate will edge up to 4.7% by mid 2025, suggesting that the real cash rate has become too restrictive.

“The ray of light in an otherwise grey economic narrative has been the strength of Australia’s labour market – although this will start to weaken – with an unemployment rate low by historic standards and relative to our developed economy peers. The flip side to this labour market strength has been falling productivity – the fundamental building block to economic prosperity,” according to the report.

“KPMG expects the RBA will commence the easing cycle with an initial 25bp cash rate cut in February 2025… followed by two further such cuts by the middle of the year and two more by the end of 2025 or early 2026.”

The RBA has indicated that for inflation to remain consistently within its target range of 2-3%, the unemployment rate would ideally sit around 4.5% . However, headline inflation has already declined significantly, falling from a peak of 7.8% in December 2022 to 2.4% in December 2024. During this same period, the unemployment rate increased from 3.5% to 4.0%.

Despite KPMG’s assessment, the RBA may want to see unemployment rise a little higher towards where the central bank deems it needs to be before beginning a rate tightening cycle.

The latest ABS figures revealed that the Wage Price Index (WPI) rose 0.8% during the third quarter of last year. However, annually, wage growth slipped from 4.1% in the June quarter to just 3.5% for the year to September 2024.

ABS head of prices statistics Michelle Marquardt noted that this was the first time wages growth had fallen below 4.0% since the June quarter 2023.

The December quarter wage statistics won’t be released until the day after the RBA’s February cash rate decision, so the Board will need to rely on the above data as part of its assessment.

While wages are finally outpacing inflation, the September quarter figures show a decline in the pace of wages growth, suggesting that inflationary pressure from rising wages may be easing.

The latest national accounts data shows annual productivity declining by 0.8%. In 2022, Treasury Secretary Steven Kennedy outlined a wages-to-productivity rule of thumb , offering an estimate of the wage growth threshold that would avoid adding inflationary pressure.

Kennedy’s framework: Nominal wage growth = Productivity growth + Inflation target (2.5%)

Current stats: -0.8 productivity growth + 2.5% inflation target = 1.7% wage growth limit

Under Kennedy’s rule , wage growth should ideally be restrained to 1.7%. However, actual wage growth is currently a little over twice this (3.5%), suggesting that labour costs are rising faster than productivity improvements, which could lead to businesses passing higher costs onto consumers and thus sustaining inflation. This could encourage the RBA to hold rates. 

The Australian dollar (AUD) has experienced a sharp decline against the US dollar (USD) in recent months. According to RBA data , the AUD/USD exchange rate has fallen from 0.6932 on September 30, 2024, to 0.6190 on February 4, 2025.

This depreciation of the AUD can have mixed implications for the Australian economy. On one hand, a weaker currency makes Australian exports more competitive internationally, potentially boosting the trade balance. On the other hand, it can lead to higher import prices, contributing to domestic inflationary pressures.

So far, underlying inflation has remained subdued, largely due to declining goods inflation. However, Donald Trump’s new US tariffs on China and other nations could dampen global trade and heap downward pressure on the AUD. A weaker Australian dollar increases import costs, which could erode recent gains in price stability and drive inflation higher in the months ahead.

The RBA may keep rates unchanged, signalling inflation concerns arising from a weaker AUD.

The RBA's latest Statement on Monetary Policy , released in December 2024, highlights that while inflation has eased considerably, underlying inflation remains above the target range. Meanwhile, economic growth has stagnated, and household consumption is weak.

Given the latest economic data:

• Inflation is comfortably within the target range, though core inflation remains elevated.
• Economic growth is slow – per capita GDP in negative territory for seven straight quarters.
• The labour market remains resilient but is beginning to weaken, with unemployment rising.
• Wages growth is easing but still markedly above levels consistent with productivity growth.
• The AUD/USD exchange rate has depreciated, which may increase import-driven inflation.

In 2024, the RBA Board reduced the number of meetings it holds each year from 11 to eight, to allow for more in-depth analysis and decision-making. In March, it will undergo another significant overhaul, splitting into two separate entities – one focused solely on setting the cash rate and another dedicated to governance and oversight. This means that the composition of the rate-setting body will change between the next meeting in February and April's decision.

As the final decision made under the current board structure, policymakers may opt for a more cautious approach in February, preferring stability ahead of the transition.

What’s our prediction?

The central bank seems poised to continue its wait-and-see approach, holding out for consistent economic data before making any adjustments. However, if inflation continues to abate and unemployment rises, a rate cut could be on the table as early as the second quarter of 2025.

Despite the Australian Securities Exchange’s (ASX) RBA Rate Indicator pricing a 95% chance of a February rate cut and all Big Four banks forecasting a move, the RBA’s historically cautious stance on inflation suggests it will hold rates steady for now – but ease sooner rather than later.

It’s important to note that this is simply a prediction and cannot be relied upon when considering personal and commercial financial decisions. Additionally, the RBA considers a number of domestic and international data points when determining the cash rate each month.

For more, see Mozo’s latest ‘When will interest rates come down?’ and related ‘RBA’ articles.