A 25 basis point cash rate cut looks the likeliest outcome of Tuesday's monetary policy meeting.
Since the Q4 inflation numbers, the ASX RBA rate tracker has estimated market expectations of a cut to be at least 90%.
Economists from all of the big four banks also now concur governor Michele Bullock and the RBA are likely to have enough confidence in the inflation outlook to cut.
If it does happen, it will be the first time rates have changed since the increase to 4.35% in November 2023; it will also be the first time since November 2020 there's been a cut.
Why is a cut likely?
Messaging from the RBA has been consistent - rates will remain as high as needs be for inflation to return to target.
Michele Bullock has acknowledged the struggles of mortgage holders who have seen their repayments increase dramatically, but has been firm that reducing inflation is the priority.
"[Inflation] is one of the key reasons why people are doing it tough and finding it harder to meet ends meet," she said in December.
Over the three months to December, prices rose just 0.2%, the lowest quarterly inflation since June 2020.
Underlying inflation, excluding volatile goods like fuel, was 3.2% through the year of 2024.
That's still above the target range of 2-3%, but down significantly from June 2024, when annual underlying inflation was 4%.
Since trimmed mean inflation peaked at 6.2% over the year to December 2022, the cash rate increases appear to have had the desired affect.
Households have tightened the purse strings, and many feel the RBA now need to make sure overly restrictive monetary policy doesn't push the economy into recession.
Other central banks around the world including the Bank of England and the US Federal Reserve have already started their rate cutting cycles, albeit from a higher peak.
Arguments against a cut
While inflation has moderated significantly, it remains above the target range.
The RBA may decide to take a cautious, 'wait and see' approach which would mean leaving rates unchanged until inflation drops into the target range.
That would be more aligned with the rhetoric of the RBA board over the past year or so.
However, it's been suggested that the RBA deliberately uses a hawkish tone so mortgage holders curb spending further in anticipation of higher rates for longer - called jawboning.
As far as the data goes, the labour market is the biggest argument against cutting.
The unemployment rate remains at 4%, below the forecasts in the most recent Statement on Monetary Policy.
The RBA has no officially disclosed 'Non-Accelerating Inflation Rate of Unemployment' (NAIRU), but some, including Rob Talevski, CEO of WeBull Securities Australia, believe 4% is too low for the RBA's liking.
"You've got a lot of people employed, there's spending and that can keep [inflationary] pressure up," he told the Savings Tip Jar podcast.
"A lot of people are calling [cuts] for February - I don't think we'll see it."
Will the election be a factor?
It's been suggested that despite its independence, there could be political considerations for the RBA with a federal election at most three months away.
Some Labor Ministers, including Assistant Immigration Minister Matt Thistlethwaite, have called for a cut despite a rumoured 'gag order' from Treasurer Jim Chalmers.
"I reckon [mortgage holders] deserve some rate relief, but we'll have to wait and see what happens tomorrow," Mr Thistlethwaite told Sky News on Monday.
It could be pretty convenient for the current government if rates are cut before the election, and there's been some conspiratorial talk from the other side of the aisle about the personnel changes to the RBA board.
Luci Ellis, Chief Westpac Economist and former Assistant RBA Governor, said there could be "awkward optics" around the forthcoming changes.
"If the current Board held rates steady in February and then the revamped Board cut rates in April, it would look like the government 'stacked' the board to get the desired result," Ms Ellis said.
"There is an argument the current board will opt to get on with it [i.e cut in February] rather than get caught up in the politics of the situation."
Picture from the Reserve Bank of Australia
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