Millions of Australian mortgage holders may need to revise their expectations for interest rate relief in 2025. While financial markets and a majority of economists anticipate at least one more Reserve Bank of Australia (RBA) rate cut this year, Governor Michele Bullock and the central bank’s language suggest otherwise.
RBA Holds Firm
The RBA kept its cash rate at 4.1% in April, following a single rate cut in February — the first since November 2020. While some interpreted the February cut as the beginning of a series of reductions, Bullock has since reiterated the bank’s cautious stance.
READ MORE: Super Fund Took Over 500 Days to Approve Death Benefit for Grieving Widow, ASIC Says
“We are still restrictive,” she noted at a recent press conference. “We are waiting for more evidence that we are getting inflation sustainably back in the band [2-3%].”
In fact, the RBA dropped its previous reference to “gaining confidence” that inflation was on track to target. The latest Monetary Policy Decision Statement acknowledged continued underlying inflation decline but emphasized risks on both sides.
When pressed, Bullock clarified: “I wouldn’t say we’ve lost confidence … we’re gradually getting more confidence but we don’t have 100% confidence.”
The Inflation Puzzle
Core or underlying inflation is still hovering above target, at 3.2%. Economists agree that the Q1 inflation data, due April 30, will need to show a sustained fall toward 3% or below to justify another rate cut.
Services inflation, however, remains sticky — insurance premiums, rent, and out-of-pocket healthcare costs are all running above 3%. Even though some of these aren’t directly driven by consumer demand, they remain a concern for the RBA.
Financial Markets Diverge
Despite the RBA’s cautious tone, markets have priced in up to two or three more cuts in the current cycle. For an average $750,000 variable rate mortgage over 25 years, that could mean savings of around $300 annually per rate cut. But these assumptions may be overly optimistic given the current economic indicators.
The Productivity Factor
A major concern for the RBA is the state of productivity. Bullock stressed that for wages growth to be sustainable and non-inflationary, it must be accompanied by productivity growth.
Current productivity data is not encouraging. The National Accounts report quarterly productivity growth at -0.1% for Q4 2024 and -1.2% over the year.
“If productivity didn’t pick up … then that adds inflationary pressure and then we will be trying to bring demand back into line with supply again … by raising interest rates,” Bullock said.
Wage Growth in the Spotlight
The relationship between wages and productivity has put political promises under scrutiny. Prime Minister Anthony Albanese and Opposition Leader Peter Dutton have both voiced support for real wage increases, but economists warn that without accompanying productivity gains, such rises may prove inflationary.
“Over the trend you need nominal wage rises that will deliver you an inflation target of 2.5%,” Bullock noted. “If you don’t have any productivity, then you can only have lower wage rises.”
Growing Risks to Outlook
Independent economist Saul Eslake pointed out that weak productivity could lead to inflationary pressure even with moderate wage growth.
“If productivity growth were to remain at zero or negative, then even wage increases of 2 to 2.5% would potentially put upward pressure on inflation,” he said.
Eslake also highlighted other potential inflationary risks, including trade tariffs, expansive fiscal policy, and rising household inflation expectations — particularly in the United States.
Although Bullock noted that the fiscal impulse remains unchanged from the Mid-Year Economic and Fiscal Outlook, economists remain cautious.
Conclusion
With inflation still above target, productivity lagging, and core services inflation proving persistent, the RBA is unlikely to act without clearer evidence that inflation is sustainably declining. For homeowners hoping for immediate mortgage relief, the path forward may involve more waiting than anticipated.
