Welcome to 2025. The RBA announced its first decision for 2025, cutting the official cash rate by 0.25% to 4.10%.
As we start the year, a recent RBA study showed interest in studying economics is at concerning low levels. So, with that in mind I will try and keep the year as interesting as possible!
Money markets had implied a majority chance that the first interest rate cut since 2020 would be delivered after inflation slowed at a better than expected pace of 3.2%. So this result was not a surprise, though it will have been a closer call than people think.
The RBA would have had a close eye on the US for guidance. The US began easing last September, however inflationary pressures are building again already. They won't want the same situation here.
We now watch with keen interest the extent and timing of any adjustments to mortgage settings.
There are generally no winners from trade wars. Locally, we may be relatively unaffected if we argue for an exemption from US tariffs, as they run a bilateral trade surplus with Australia. More material to direct tariffs could be any 'collateral damage' from US tariffs on China if, in the long term, they have a material impact on Chinese demand for Australian mineral and energy inputs.
Watch this space, though, as the Trump administration is focused on supporting the domestic production of steel, aluminium and other related products in the US.
For context, the US is Australia's 5th biggest export partner, representing less than 5% of total flows, China remains our biggest at over 40%.
With a pause at the December 2024 meeting, the RBA commentary talked about its focus on inflation and that its "trimmed mean" was still out of range.
There was mention of both inflation and uncertainty of what lies ahead; "Underlying inflation remains too high. Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Measures of underlying inflation are around 3.5%, which is still some way from the 2.5% midpoint of the inflation target."
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."
In short, all the media commentary and Government pressure is just noise.
The All Ordinaries market showed black ink, and was in part expected given the expectations of future interest rate cuts.
The local news was dominated by Chemist Warehouse’s $34 billion ASX debut which went better than forecast, and shined a light for other potential companies to follow. This listing, trading as Sigma Healthcare created Australia’s 22nd largest listed company and was also a massive win for the franchisees.
Again, our equity market index was largely reflective of international markets over the last month.
|
Country |
Mark |
1 Month |
6 Months |
1 Year |
5 Years |
|
Australia |
All Ords |
4.3% |
9.1% | 12.4% | 22.1% |
|
Germany |
Dax |
9.4% |
22.8% | 32.1% | 63.8% |
|
Japan |
Nikkei Dow |
1.8% |
6.6% | 2.6% | 65.3% |
|
UK |
FTSE |
4.8% |
3.8% | 14.1% | 14.6% |
|
USA |
Dow Jones |
3.1% | 9.8% | 14.9% | 51.5% |
|
Average |
4.7% | 10.4% | 15.2% | 43.5% |
Most markets absorbed concerns around trade conditions and continue to post good results. The US was tempered by a fall in expectation around the extent of cuts to interest rates. In Japan, X Advanced Metals (JXAM) will test their local market as it won approval to list its shares in a $3 billion share offering, the biggest IPO since 2018.
The road ahead will be based more on fundamentals, well maybe, as markets have priced in a new interest rate and inflation paradigm. The confidence of new listings will give investors more options, so there could be volatility inside respective markets.
Again, a relatively stable period of expectations. There was a 10-20 point downward trend across the curve.
As a result, the graph shows slightly stronger falls priced in for the ASX Cash Rate Futures.
As we know, this can change quickly especially if expectations are not met, and the RBA has shown it can be unpredictable.
The story of central banks worldwide is still mainly on easing rates. This was led by NZ, Canada and the UK with the US now being the potential outlier.
New Zealand's central bank meets this week with another rate cut anticipated. With inflation now close to the midpoint of their target band, combined with weak growth and employment data, expect more action. NZ climbed the monetary policy mountain quickly, and it seems to be moving downhill at a similar pace.
The U.S. January inflation data was stronger than expected, providing still more room for the US Federal Reserve to hold interest rates at their current level for longer, but there is no certainty that there will be a pattern of further easing. This situation will be a key marker for 2025, impacting many other economic variables.
In the UK, The Bank of England is now at 4.50% after a 25-point reduction last time. The Bank of England governor indicated that any further cuts were likely to be gradual with a strong eye on inflation and growth. On the latter, the forecast has been downgraded to just 0.75% this year.
Canada delivered a 25-point rate cut last month to just 3.00%. The easing was a proactive effort and is now further flamed by the imminent threat of tariffs on the broader economy. Canadian and US monetary policies are now very diverse.
Before posting any changes today, we compare central bank cash rates and their longer term 10-year bond yields.
We see a return to more normal yield curves. Many short-term rates fell and their respective 10-year bonds held ground, or in some cases saw an increase. A welcome sight for many economists.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.10% | 4.47% | 0.37% |
|
Canada
|
3.00% | 3.10% | 0.10% |
|
China
|
3.10% | 1.66% | -1.44% |
| Germany | 2.90% | 2.44% | -0.46% |
| India | 6.25% | 6.82% | 0.57% |
| Japan | 0.50% | 1.34% | 0.84% |
| New Zealand | 4.25% | 4.46% | 0.21% |
| UK | 4.50% | 4.51% | 0.01% |
| USA | 4.50% | 4.48% | -0.02% |
| Average | 3.68% | 3.70% | 0.02% |
Australia’s longer-term interest rates continue to move about but we are largely no where near we were from December. Short term rate drops are priced in and this means that Australia's yield curve will be more normal (for now).
This says that the markets overreacted post US election on fears of higher inflation monetary policy settings.
The latest residential monthly property results from CoreLogic (see table below) rose by just 0.1% in November, the weakest result since January 2023. The softening indicates that the 22 consecutive months of growth could be coming to an end.
| Location | Month | Quarter | Annual |
|
Adelaide
|
0.7% |
1.8% |
12.7% |
|
Brisbane
|
0.3% |
1.2% |
10.4% |
|
Hobart
|
0.0% |
-0.8% |
-0.4% |
|
Melbourne
|
-0.6% |
-2.0% |
-3.3% |
|
Sydney
|
-0.4% |
-1.4% |
1.7% |
|
Perth
|
0.4% |
1.0% |
17.1% |
|
All Capitals
|
-0.2% |
-0.7% |
3.8% |
|
All Regionals
|
0.4% |
1.0% |
5.8% |
It is evident that Australia’s property market is slowing. We expect this to continue in the near term; Melbourne & Sydney city values have been falling, while the pace of house price growth in Adelaide, Brisbane and Perth is levelling out. Forward indicators such as auction clearance rates and time on the market are softer, which supports the macro statement above.
The more expensive properties have led the decline.
The offset is human behaviour, which in relation to property is strange. If we get, say, two rate cuts, those who are waiting for rates to fall will be tempted to jump back in.
With world economics (as opposed to local) on the stage more than ever before, macro indicators such as Debt to Income Ratio have become increasingly relevant.
While income levels and productivity remain stagnant in Australia, the challenge for households and businesses is conflicted.
At one level, consumer or business caution means they are saving more as their outlooks can be uncertain. The ripple effect is that less spending in the economy requires Government spending to fill the gap. This cannot be sustained indefinitely. We need a strong "Balance Sheet" but a sustainable "Profit & Loss" too. The timing of building both is rarely aligned.
Property remains at the heart of our wealth, with property representing over 11 Trillion of household wealth. However the nexus between income and assets may continue to deteriorate.
For businesses connected to consumer spending and confidence, the immediate road ahead may be challenging. Staying ahead will require close management and understand of business cashflow.
The Australian dollar has endured a challenging period, with its recent performance seeing post Covid-19 level lows against the USD. The AUD is sensitive to tariff news, particularly with contagion risks to China. Though in the context of all that it has been a little more resilient than expected.
The Aussie dollar seems to have some underlying support, and there is an optimistic view that it could strengthen against the USD in the coming year.
| Country | Type | $1 AUD Buys | Period Change | Year Change |
| Canada | Dollar | 0.90 | -0.4% | 2.4% |
| China | Yuan | 4.61 | -0.8% | -0.2% |
| Eurozone | Euro | 0.61 | 0.1% | 0.0% |
| Japan | Yen | 96.74 | 0.9% | -1.0% |
| New Zealand | Dollar | 1.11 | 1.1% | 3.9% |
| UK | Dollar | 0.50 | 0.6% | -2.3% |
| United States | Dollar | 0.63 | -0.6% | -2.2% |
The New Zealand pricing between Australia, largely reflects the positioning with respective interest rate settings.
We hope you enjoyed our first Economy & Property Insights post for 2025, and we wish you every success for the year ahead.
Monetary Policy Announcements will be made at 2.30pm on the following Tuesdays in 2025:
• 1 April
• 20 May
• 8 July
• 12 August
• 30 September
• 4 November
• 9 December
As always, we will continue to keep you informed.
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