Final major bank surprises with unexpected rate cut

The last of Australia's top four banks now expect interest rates to be slashed in February, giving relief three months earlier to struggling homeowners - with another surprise on the way.

NAB Group senior economist Alan Oster now expects the Reserve Bank to not only lower the cash rate in February but to drop it by 25 basis points - twice the common expectation of a milder approach of 12.5 basis points at the time this year.

"We now expect the RBA to cut the cash rate by 25 bps in February," he said to reporters. "We still expect the cutting phase to be gradual, with the RBA taking the cash rate down to 3.1 per cent by February 2026."

According to Canstar calculations, a 0.25pp decrease would immediately return $92 to someone with a $600,000 debt and 25 years remaining on their loan, assuming the banks passed it on in full.

The NAB move comes a day after Westpac moved the timetable of the first-rate decrease to February, bringing all four to the same page after inflation data eased faster than the RBA predicted over the holiday period.

Denton Pugh, NAB's home loan executive, stated that "many Australians have been struggling, so a cut early in the new year will be welcomed." As usual, we are here to aid our customers; please get in touch with your bank if you require assistance."

"While Australia's labour market remains strong, we do not see current conditions as inflationary."

The February action was supposed to signal the beginning of the central bank's progressive lowering of the official cash rate, he said.

Sally Tindall, Canstar.com.au's data insights director, stated that inflation was "close enough to warrant action" now and encouraged homeowners to contact their lender rather than waiting for the RBA's February meeting.

"A rate cut in February has the potential to inject almost $100 a month back into the budget of someone with a $600,000 mortgage with what should be at least one more rate cut waiting in the wings."

"Pick up the phone today and ask your bank for a rate cut. Of course, there is no certainty that the RBA will move next month; services inflation may continue to keep the Board awake at night, keeping the cash rate in its current holding pattern for another several months. So, if you have a mortgage, don't expect rate relief until it reaches your bank account."

Mr Oster indicated that "our view since June has been that the RBA would cut 75 or 100bp in 2025, beginning in February or May".

However, he stated that "there is still value in waiting."

"The pivot in the RBA's communication in December, confirmation of a weaker-than-expected CPI outcome for Q4, and a softer outlook for the housing components of inflation (compared to the November staff forecasts), combined with further encouraging progress on market services, leads us to believe that the RBA will now make the first cut in February.

However, he predicted that any cutbacks this year would be slow.

"While the board is likely to have gained confidence that inflation will sustainably return to target as soon as late 2025, the labour market remains resilient (and there is some risk of retightening) with growth still expected to pick-up this year."

At its latest board meeting on December 10, the RBA held the cash rate target steady at 4.35 per cent. The ASX rate tracker now predicts a 95 per cent possibility of a rate drop to 4.1 per cent at the next meeting on February 18.