RBA and Interest Rate Profile 2025: Challenges of Monetary Policy Ahead

In early February 2025, the Reserve Bank of Australia took the long-anticipated step by implementing its first monetary tightening of the year. This decision raised significant questions about how the interest rate profile will evolve in the coming months, particularly regarding potential further actions at the next meeting.

Luci Ellis, chief economist at Westpac and former assistant governor of the RBA, explained in an interview that the scenario is not as straightforward as the market previously anticipated. While the main projection still expects the next move to occur in May 2025, Ellis did not rule out the possibility of more aggressive measures.

Historic RBA Decision in Early February

On the first Tuesday of February, the RBA became the first major monetary authority to move interest rates this year. This move surprised many observers who still believed the central bank would wait for first-quarter inflation data before acting. This shift in momentum indicates an urgency to address inflationary pressures that are more significant than initially expected.

Ellis: March Rate Profile Depends on Data Momentum

In her assessment, Ellis stated that “the possibility of consecutive rate hikes in March cannot be entirely ruled out.” This statement serves as an important signal given her experience as a veteran of monetary policy. She added that if economic data flows between February and March show sustained or increasing pressures, the central bank may be forced to act more quickly than previously planned.

Ellis also shared her observations on RBA governor communication. “The governor clearly stated in the press conference that their inflation trajectory projections are unacceptable. They want to bring inflation down faster than the market’s adapted calendar,” she said. This reflects the RBA leadership’s strong determination to be more aggressive with the interest rate profile if data support such a move.

Market Expectations and Consecutive Action Thresholds

Most traders and market analysts previously assumed that the threshold for consecutive monetary actions was quite high, and that the market was more prepared for a single rate hike followed by a long pause. However, Ellis’s statements and signals from the RBA have altered the probability calculations. This creates greater uncertainty about how the interest rate profile in 2025 will develop.

Inflation Scenarios and Policy Logic

Ellis emphasized that if economic conditions develop according to their baseline expectations, the RBA has room to maintain its stance until the May meeting. However, the governor’s ambition to accelerate inflation reduction adds a layer of complexity to upcoming rate decisions. Any economic data releases in the coming weeks will be crucial in determining the next steps.

Thus, Australia’s interest rate profile for the first quarter of 2025 remains open to various scenarios, with real-time data being the key factor in the RBA’s monetary policy trajectory.