AUDUSD: We expect 100bp of RBA cuts in 2025The market is pricing in the first 25bp rate cut from the Reserve Bank of Australia (RBA) next week on 18 February. While this is in line with our view and we place a 60% probability to it, we think the decision to cut or pause will be a close one – and it’s therefore not a done deal. Key to our thinking is that the wage pressures have eased more than expected and household consumption growth has been weaker than expected, which should give the RBA more comfort to ease. However, the unemployment rate is still below the central bank’s target, which could result in more uncertainty on the pace and timing of rate cuts.
Weak employment details support our call for a rate cut in February. For December 2024, despite the strong headline employment growth number, the increase largely came from the part-time sector. Even on a trend basis, we can see a weakening trend of full-time employment growth, while the pace of part-time employment growth has improved. Part-time jobs – which are almost by definition more poorly paid, and often come with lower job security, perks and other benefits – will have a smaller impact, job-for-job, on household spending than full-time employment growth.
The AUD cash rate future curve fully prices in a 25bp rate cut in February, and a total of 83bp of easing by the end of the year. That follows a dovish shift in rate expectations, with markets having added almost 50bp of additional cuts for 2025 since mid-November.
While we acknowledge the risk of inflationary bumps slowing easing plans, we currently forecast a total of 100bp of RBA easing in 2025 (including this February cut), taking rates to a terminal level of 3.35%.
