The Reserve Bank board met yesterday. While it didn’t change the cash rate of interest, it did change the ‘tone’ of its communication to the market about rate cuts and, importantly, rate rises that now we can confidently argue are off the table.

Right now, the cash rate is 4.35%. That’s a 13-year high after 13 rate hikes that started in early 2022.

In eco-speak, the RBA has gone from mildly hawkish, where rate rises were possible, to dovish hinting that a rate cut isn’t far off.

How was this message conveyed?

Consider the following evidence:

1. It noted softer economic data. The 0.3% growth rate in the September quarter must have been an important point of concern.
2. It no longer said it was “not ruling anything in or out”, implying don’t discount a rate rise.
3. The November board minutes gave the impression that the RBA needed to see two good quarters of inflation drops. Now Governor Bullock had a new take saying she’s not just looking at “one number”, namely inflation.

The tone and message change has led to money market players who buy bonds (whose prices are driven by what’s happening to official interest rates), are betting 70% that the first cut comes in February!

“The groundwork seems like it is being laid by the RBA for a February rate cut next year,” Luke McMillan, head of research at Ophir Asset Management told the AFR’s Cecile Lefort. “Market pricing certainly looks like a February rate cut is more likely than not.”

Angus Coote, co-founder of Jamieson Coote Bonds, told the AFR that the RBA’s next board meeting in February as “alive and well”. He’s tipping a February rate cut but this will lift the spirits of interest rate worriers and Prime Minister Anthony Albanese, as he can see a total of four reductions in 2025!

Before the February 18 rates decision happens, we’ll see unemployment and inflation readings that will be crucial in determining when cuts start and how many we get. The December quarter CPI comes out on January 29. This will be a ‘must watch’ number for the RBA and rate-cut hopefuls.

In all the analysis and utterances on why a rate cut might be closer than the calls last week (which were all talking about the first cut being in May), was the fact that the weak 0.3% growth rate was for the September quarter, which started in July and finished in September. It’s now two and a half months on, and house prices are starting to fall, auction clearance rates are too, and the ANZ-Indeed Australian Job Ads has fallen 27.6% from its peak in June 2022.

It was only mid-year that just about all borrowers went over the so-called mortgage cliff and went on to higher variable interest rate loans. This means the 13 rate rises are having a ‘reality bites’ impact.

At least 880,000 fixed-rate mortgages expired in 2023 and then another 450,000 this year. A report out yesterday from the Actuaries Institute reported that 1.6 million homes around the country were experiencing “extreme home insurance affordability pressures”.

It was suggested that close to 200,000 borrowers have or will drop their mortgage insurance, which could be a breach of the home loan agreement with their lender.

A survey by Finder.com.au showed how rate rises were starting to hurt. It found:

• A record 47% of borrowers were struggling to pay their home loan.
• This was the highest level since Finder began surveying Australians on this topic in May 2019.
• 1 in 7 (14%) or 462,000 borrowers said they'd have to sell or apply for hardship if interest rates remained the same until February.
• Almost 2 in 5 (39%) – equivalent to 1.3 million mortgage holders – would have to cut back spending to afford their mortgage over the coming four months.

When I taught economics at the University of New South Wales, I talked about the time lag that went with monetary or interest rate policy. That lag is never the same, meaning it can be shorter or longer than expected. However, given we expected a rate cut in 2024 and we missed that chance yesterday, if the CPI on January 29 shows a lower core inflation number, then that February rate cut will be a really good chance.