How much, and when the RBA Will cut Interest Rates in 2025

Central Bank

Summary:

The December RBA Board meeting surprised markets due to the changed tone of the RBA statement, indicating the RBA Board was growing more confident inflation is moving back towards the central bank’s target.In her press conference following the meeting, Governor Michelle Bullock cited several moderating economic factors for the RBA’s shift in thinking.Markets have interpreted the December meeting as decidedly dovish, that is, increasing the chance the RBA will cut interest rates sooner, and likely deeper, than initially thought.

The Reserve Bank of Australia (“RBA”) concluded its December 2024 meeting by maintaining its official cash rate (“OCR”) at 4.35%, marking the ninth consecutive meeting and the thirteenth consecutive month at this level. This was not the headline, however – this is exactly what the market expected.

Despite the seemingly benign outcome, there were some massive moves in markets post-meeting, and equally large changes in the expectations surrounding the timing and magnitude of RBA interest rate cuts in 2025. A picture tells a thousand words, so let’s check out some of the moves the decision triggered across markets in charts:

Exhibit 1: Massive plunge in key risk-free market yield benchmarks

How much, and when the RBA Will cut Interest Rates in 2025_1

The benchmark for short term Australian government bond yields, the 2-Year bond, fell by 12 basis points to 3.77%. Markets effectively delivered half a typical interest rate cut (i.e., 0.25%) immediately following the December Board meeting.

Exhibit 2: Big drop in the Australian dollar

How much, and when the RBA Will cut Interest Rates in 2025_2

The Australian dollar fell 1%, reaching approximately 63.75 US cents, its lowest level in over a year. Currency values are all about relative risk-free returns across countries. If markets anticipate they will earn a lesser yield in Australia (because of increased official interest rate cuts) compared to the USA, they will sell down the Australian dollar in favour of the higher yielding US dollar.

Exhibit 3: Dip and draw in the Implied Yield Curve

How much, and when the RBA Will cut Interest Rates in 2025_3

The ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve is a market proxy for the RBA’s OCR. The Yield Curve provides investors with a graphical representation of where the market is predicting the OCR will be down the track.

I have overlaid the December 10 Yield curve (light blue bars) over the December 9 curve (dark blue bars) to illustrate the change in market expectations for the timing and magnitude of RBA interest rate cuts both before and after the December Board meeting. I’ve also drawn on the schedule levels equating to the next 1.0% of 0.25% cuts.

Generally, the market has lowered its expected level of the OCR through the 18 month look-forward period. Where the light blue bars touch an interest rate cut level tells you when the market has fully factored in the relevant cut.

In terms of first cut timing, the curve has experienced the following notable changes:

The next RBA meeting is 5-6 February, the chance of an interest rate cut at this meeting has increased from 28% to 34%

March meeting cut probabilities increased from 60% to 72%

There is no meeting in April, but this is when the market is factoring the first rate cut (interpret this as hedging their bets between the March and May meetings!) The interesting item here is that the probability of a larger, 0.5% cut, increased from just 6% to 28%.

The second 0.25% rate cut has moved in from July to June.

The third 0.25% rate cut has moved in from December to September.

There was no fourth 0.25% rate cut in the Yield Curve’s look forward period ending May 2026, but there’s now a 98% probability it will occur in that month

In summary, markets believe the first RBA interest rate cut is a lock by May next year, but the probability of a surprise March cut has increased. Mortgage holders are still likely to get three 0.25% cuts in 2025, but they are likely to occur three months earlier by September. There is now a fourth cut in the mix by May 2026.

Why did markets react so vigorously to the December RBA meeting?

Here are the key takeaways from the December meeting statement and post-meeting press conference by Governor Michelle Bullock that caused the market to pivot so substantially:

Statement

Expressed "gaining some confidence that inflation is moving sustainably towards its target", this a departure from previous assertions about the necessity of maintaining restrictive policies.

Omitted earlier references to being vigilant against upside risks to inflation and the commitment to keeping policy sufficiently restrictive until confident of inflation's trajectory.

Added references to weakening Australian economic growth, "While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November", in particular citing the worse than expected September quarter GDP figures, noting it was "the slowest pace of growth since the early 1990s".

Added the statement: "Wage pressures have eased more than expected in the November SMP." – again, arguably dovish.

Replaced "But there are uncertainties" with "Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close."

Press conference

“Some indicators softening in line with our forecasts, that said, on balance, some data is a little softer than expected. This has given the Board some confidence that inflationary pressures are declining, but risks remain.”

Which data? “The national accounts data weren’t as strong as expected, the Wages Price Index came a little bit lower than what we thought it might be, inflation data were broadly in-line. It’s not only slowing as we’d like, it’s slowing a little-bit more and that’s positive for inflationary pressures…it’s giving us confidence we’re coming on our narrow forecast path.”

“Some of those risks to upside inflation have eased. We have noticed [the weaker data] and we do need to take a bit of a signal from that, but upside risks remain.”

In summary, the RBA's December meeting maintained the current cash rate but signaled a marked shift towards a more accommodative stance. Markets are now anticipating potential rate cuts to occur sooner and to a greater magnitude in early 2025. The news is arguably positive for mortgage holders, and also likely, for stocks which also tend to benefit from lower official interest rates.

If there is a group of losers out of the developments of the last 24-hours, it's likely to be those with cash in the bank. It might be time to think about locking in those higher deposit rates while you still can!

Source: Carl Capolingua

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Warren Takunda

Onchain options protocol Derive says data shows Ethereum has less than a 10% chance of hitting the much-anticipated $5,000 mark by the end of 2024, despite significant inflows into spot Ether exchange-traded funds (ETFs) hinting at a looming “supply-side crisis.”

The probability that Ether will reach $5,000 by Dec. 27 “climbed to 16% at its peak but has recently adjusted down to just over 8%,” Derive head of research Sean Dawson said in a Dec. 10 markets report. Ethereum Has Less Than 10% Chance of Tapping $5K by Year-End, Says Derive_1

Ethereum Has Less Than 10% Chance of Tapping $5K by Year-End, Says Derive_1

Ether’s chances of reaching $5,000 by the end of the year have fallen by about 50%. Source: Derive.xyz

ETH needs a 37% jump from its current price of $3,669 to reach $5,000, CoinMarketCap shows.

Dawson added that “the trading of calls and puts for ETH is evenly distributed, suggesting a neutral market sentiment.”

“TradFi is gobbling up cheap ETH” — trader

Pseudonymous crypto trader CoinMamba holds a different view, saying in a Dec. 10 X post that their “target for ETH is still $5k by the end of this year.”

“Do what you will with that information,” they added. Ethereum Has Less Than 10% Chance of Tapping $5K by Year-End, Says Derive_2

Ether was trading at $3,661 at the time of publication. Source: CoinMarketCap

Meanwhile, in an X post on the same day, Ethereum contributor Eric Conner pointed to the $305 million in Ether ETF daily inflows on Dec. 10 as a signal that a “supply side crisis” is coming.

Ethereum educator Anthony Sassano added that “TradFi is gobbling up the cheap ETH.”

Of the $305 million in inflows, Fidelity Ethereum Fund accounted for $202.2 million, according to Farside data.

Ether new all-time high call within the week

This follows a Dec. 9 claim from Bankless podcast host Ryan Adams, who suggested that a new Ether all-time high “could happen” within the next week. Ether’s current all-time high is $4,878, reached in November 2021.

Meanwhile, pseudonymous crypto trader Pentoshi said in a Dec. 9 X post to his 830,900 followers that Ether “is having structural changes as well as the beginning of consistent and large ETF flows.”

They highlighted that ETH had its “highest weekly close of the year” and echoed Adams’ sentiment, suggesting a retest of its all-time high could happen sooner than many traders anticipate.

Source: Cointelegraph

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ING

Economic

Central Bank

Inflation remains too hot for comfort

US core CPI in November has come in at 0.3% month-on-month, as expected, and headline has done likewise. The year-on-year headline rate ticks up to 2.7% from 2.6% while the annual core rate has remained at 3.3%. The details show housing looking a little more benign with owners' equivalent rent and primary rents coming in at a pleasing 0.2% MoM, apparel posting a similar increase and education and communication prices falling 0.4% MoM. The upside pressure largely came from vehicle prices with new vehicles rising 0.6% MoM and used vehicles jumping 2% MoM after a 2.7% increase in October. Most other components came in at around 0.3%.

US core CPI metrics

Sticky US Inflation Points to a More Cautious Fed in 2025_1

Fed to cut more cautiously from now on

This is the fourth consecutive 0.3% MoM print and as the chart above shows, the annual inflation rate has stalled at just above 3% for the past six months while the 3M annualised rate has picked up markedly since the summer. To be confident inflation will return to the 2% YoY target we need to see the MoM rate (blue bars) track at 0.17% MoM over time (the black line). It is simply too hot right now. That said, with PPI expected to post a 0.2% increase tomorrow we should be on course for a 0.2% MoM print for the Fed's favored inflation measure – the core PCE deflator – next week.

In terms of implication for policy, the jobs market is cooling and the Federal Reserve repeatedly acknowledges that monetary policy is still in restrictive territory. As such, the Fed appears happy to gradually move policy closer to the neutral level of around 3% and we expect another 25bp rate cut next week. However, the lack of meaningful progress on inflation means that in their summary of economic projections, officials are likely to signal just three rate cuts in 2025 versus the four they projected in September.

Source:ING

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Warren Takunda

Economic

Prime Minister Justin Trudeau said Canada “will respond” if U.S. President-elect Donald Trump imposes new tariffs on Canadian imports, and argued that retaliatory tariffs were successful when Trump put tariffs on Canadian steel and aluminum in 2018.

The comments on Monday were Trudeau’s strongest language yet in signaling his government is preparing retaliation if Trump follows through on his threat.

g Trudeau’s remarks, Trump repeated his jab about Canada being like a U.S. state in a post on his social media site. Canadian officials have downplayed the quip as teasing since Trump made the joke during a meal with Trudeau at his Mar-a-Lago resort on Nov. 29.

“It was a pleasure to have dinner the other night with Governor Justin Trudeau of the Great State of Canada,” Trump wrote on Truth Social. “I look forward to seeing the Governor again soon so that we may continue our in depth talks on Tariffs and Trade, the results of which will be truly spectacular for all!”

Days before the dinner, Trump said he would impose across-the-board 25 per cent tariffs on Canadian and Mexican imports on the first day of his presidency unless both countries crack down on the flow of migrants and fentanyl into the U.S.

“Let’s not kid ourselves in any way, shape or form: 25 per cent tariffs on everything going to the United States would be devastating for the Canadian economy,” said Trudeau on Monday, speaking to the Halifax Chamber of Commerce. But he said the tariffs would also raise costs on a wide range of goods the U.S. gets from Canada.

Canada will “respond to unfair tariffs in a number of ways, and we’re still looking at the right ways to respond, but our responses to the unfair steel and aluminum tariffs were what ended up lifting those tariffs last time,” he said.

Shortly after Trump announced the tariffs on Canadian steel and aluminum in the spring of 2018, Canada rolled out retaliatory tariffs on targeted, politically sensitive items such as “bourbon and Harley Davidsons and playing cards and Heinz ketchup,” Trudeau said.

The tariffs were “politically impactful to the president’s party and colleagues,” and that was how “we were able to punch back in a way that was actually felt by Americans,” Trudeau said.

Canadian officials have stressed that Canada is also a huge market for American businesses. “We are the biggest customer by far of U.S. exporters,” said Kirsten Hillman, Canada’s ambassador to the U.S., in a Bloomberg TV interview last week. She said 36 U.S. states count Canada as their biggest export market.

The Canadian prime minister cautioned that Trump should be taken seriously when he threatens to impose tariffs, but said history has shown Trump can have other motivations as well. “His approach will often be to challenge people, to destabilize a negotiating partner, to offer uncertainty and even sometimes a bit of chaos into the well-established hallways of democracies and institutions,” Trudeau said..

“One of the most important things for us to do is not to freak out, not to panic,” Trudeau said, arguing Canada will need a thoughtful and united approach to reach an agreement with Trump and avoid harming both economies.

However, he said managing the trade file is likely to be more difficult in Trump’s second term, despite the fact Canada, Mexico and the U.S. renegotiated the entire North American free trade pact in 2018.

“This time’s going to be different, it’s going to be a little more challenging,” Trudeau said. Trump and his inner circle are coming in with a much “clearer set of ideas of what they want to do right away than they had last time,” he said.

But he said he believes Canada can again find a “win-win” solution that works for citizens and businesses on both sides of the border.

Source: TheFinancialPost

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Owen Li

Central Bank

Economic

Yellen said Tuesday that she told Bessent, a veteran hedge-fund manager, about the breadth of the job and strength of the department’s staff, in a call before Thanksgiving. Separately, she reiterated previous warnings against encroaching on Federal Reserve independence and on broad tariff hikes, while expressing regrets on the fiscal situation.

“I congratulated him on his nomination and told him I thought he would find this an extremely interesting and challenging job,” Yellen said. She told Bessent that civil servants at the Treasury “are analytical, proficient, professional, operate with high integrity and produce analysis that can be relied on. This is important to financial markets and to the economy,” and the US Treasuries market in particular.

Answering questions Tuesday at a Wall Street Journal event, Yellen also emphasized the importance of letting the Fed operate without political interference.

“What research has shown and this is certainly what I see from my own experience is that countries perform better — they have not only inflation performance — but real performance in terms of job creation and growth is also stronger when a central bank is left to use its best judgment without political influence,” Yellen said.

Fed Independence

Asked about the potential for a president to remove the Fed chair, Yellen said that her understanding is that the central bank’s head can only be removed by the Senate for cause.

Yellen also expressed regret over failing to make more progress in narrowing the fiscal deficit during her tenure.

“I am concerned about fiscal sustainability and I am sorry that we haven’t made more progress,” she said. “I believe that the deficit needs to be brought down especially now that we’re in an environment of higher interest rates.”

The primary fiscal deficit, which excludes debt-servicing costs, “is now a little over 3% and I believe it needs to come down” relative to GDP, she said.

Source: Viktoria Dendrinou

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ING

Central Bank

Economic

The US 10yr should settle above neutrality, heading for 5%+

US market rates reached local highs following Trump’s win but have been drifting lower since. A significant retracement is appropriate after the nearly 100bp rise in the 10yr yield, which was triggered by the first Fed rate cut in mid-September. This move culminated in Trump’s clean sweep in the November elections. But as we pushed through December, we returned to basic data watching. To the extent that if the data softens, there is justification for testing lower yields.

Another factor is the end-of-year effect. It's not uncommon for bonds to do well into the turn of the year. Cash is often parked as risk trades are wound down to some extent. January is often a month in which liquidity comes back into the market, acting to help all types of bond products. That said, we identify a floor at 4% for both the 2yr and the 10yr yield. The rationale for the 4% floor centres on the market discount for the funds rate, which is only just under 4% by late 2025 (now around 3.75%).

As we progress through 2025, our vision is for the US 10yr Treasury yield to head toward the 5-5.5% range. Today a 4% SOFR rate coincides with a 4.5% 10yr Treasury yield (50bp spread vs SOFR), and 4.5% was the average Treasury yield seen during the noughties. We find this relevant as during this decade, US inflation averaged 2.5% and the Fed funds rate averaged 3%, which smacks of an equilibrium (on average).

The noughties as a neutral reference?

The difference between the 2yr and the 10yr is that the latter is far too low

Trump's tax-cutting agenda likely means the Federal Reserve lands above neutrality by some 50bp. Specifically, at 3.50%-3.75%. We also think the 10yr rate should end up above neutral. Given the inflation risk from tariffs and issues relating to the fiscal deficit, logic suggests that the 10yr rates should land at least 50bp north of neutrality. The 5-5.5% range translates to 50-100bp above a neutral 10yr yield, and translates to 10yr SOFR getting to at least 4.5%.

When we look to the front end, we find that the 2yr Treasury yield averaged 3.3% during the noughties, effectively at a 30bp spread over the funds rate. Currently, the 2yr yield trades some 40bp through the effective funds rate. If, as we expect, the Fed cuts by 100bp and nothing else happens, that would pitch the funds rate at 60bp through the 2yr yield. Based on that, there is some room for the 2yr yield to test lower, likely to the 4% area. And there is scope to dip below 4%, even if briefly.

The difference between the 2yr yield and the 10yr yield is that the 2yr yield is more likely to be held down by the pull of the funds rate as it dips below 4% and likely stays there as a theme for a decent chunk of 2025. In contrast, if the 10yr yield gets down to 4%, it’s unlikely to stay there. It’s far more likely to get pulled higher, up to the 5-5.5% area, partly on a pull from deficit pressure. That can be negated to the extent that the Trump administration manages to take action on it. It remains to be seen.

Deficit pressure, tax cuts and tariffs are all issues for longer rates to worry about

Even if the deficit pressure is reduced (and we won’t assume this just yet), the rates market will still have to contend with the impact of a tax-cutting agenda to be legislated in 2025, taking effect from 2026. On top of that is the threatened implementation of tariffs, whose effect on prices would be a thing through the second half of 2025 and 2026. We view 2026 as being closer to a 3% inflation environment than a 2% one based on this.

Currently, we have a 2% real 10yr yield. On top of that, there's a 3% inflation risk and that brings the nominal 10yr yield to 5%. Then bear in mind that the 10yr real yield averaged 2.3% during the noughties (our preferred neutral reference), and that adds another 30bp to our 10yr yield. Hence the 5% to 5.5% range.

The direction of travel for the funds rate beyond the bottoming process envisaged is a tad opaque. Normally, a bottom in the funds rate would mean just that, a bottoming. And that would mean the next move is up. The markets will likely view it this way until or unless there is a material impulse in the other direction. At this juncture, we don’t have enough policy clarity to develop a conviction view in either direction. No doubt this will evolve as we progress through 2025.

We like structural fixed-rate payers and short duration positioning for 2025

In the meantime, the call is for the 10yr yield to touch 4% around the turn of the year, but then to target 5% to 5.5% as we progress through 2025. And for the 2yr yield to hit 4% but then to retrace back up towards 4.5%. The implied curve hits 100bp. This applies to the 2/10yr Treasury curve, and the Fed funds to 10yr SOFR curve, as the 10yr SOFR rate ultimately heads to 4.5%. Based on that and our neutral references, we like structural fixed-rate payers and short-duration positioning for 2025.

Source:ING

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Justin

Commodity

Gold (XAU/USD) is hesitating on Wednesday after having rallied about 2.5% over the previous three days. The precious metal has been capped at the $2,700 round level during the early Asian session, with investors reluctant to bet against the US Dollar (USD) ahead of the release of the US Consumer Prices Index (CPI) reading at 13:30 GMT.

Price pressures in the United States are expected to have remained sticky in November, with headline inflation picking up. While the data is unlikely to deter the Federal Reserve (Fed) from cutting rates by 25 basis points (bps) next week, it might limit the scope of the easing cycle heading into 2025.

Beyond that, the situation in the Middle East remains uncertain. The Syrian rebels have appointed a prime minister for a transitional government while Israel has stepped up its attacks on the Syrian army’s facilities. Ongoing tensions in the area are buoying safe-haven flows into Gold.

Daily digest market movers: Gold rally stalls as US Dollar firms up

US consumer prices are expected to confirm that inflation remains sticky above the Fed’s 2% target rate. The headline CPI is seen growing by 0.3% in the month and by 2.7% yearly, faster than the 0.2% and 2.6% increases seen in October. The core CPI is expected to have increased at a steady 0.3% monthly and at a 3.3% yearly pace.

The CME Group’s Fed Watch Tool shows that futures markets are pricing an 86% chance of a 25 bps Fed cut after the December 17-18 meeting, and between two to three more cuts in 2025.

In Syria, the rebels have appointed the Islamist Mohammed al-Bashir as the transitional prime minister. The US and Israel have been attacking the infrastructure of the Islamic State and Syrian army bases. There is a tense calm but uncertainty about the success of the provisional government remains high.

Later today, the Bank of Canada (BoC) is expected to deliver a second consecutive 50 bps cut. The Swiss National Bank (SNB) and the European Central Bank (ECB) are expected to cut their respective benchmark rates by a quarter-percentage point on Thursday.

Technical analysis: XAU/USD consolidates gains right below $2,700

Gold’s recent rally has lost some steam, with US Treasury yields bouncing up and the US Dollar appreciating ahead of the US CPI release. The broader trend, however, remains positive, with downside attempts limited above the top of the last two week’s previous range at $2,675.Above the mentioned $2,700, the November 24 high at $2,720 will come into view ahead of the November 4,5 and 6 highs at around $2,750.

On the downside, immediate support is the intra-day low at $2,675 and then the December 9 low at $2,630, followed by the channel bottom (November 26 and December 5 lows) at $2,610.

Source: FXSTREET

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How much, and when the RBA Will cut Interest Rates in 2025

Exhibit 1: Massive plunge in key risk-free market yield benchmarks

Exhibit 2: Big drop in the Australian dollar

Exhibit 3: Dip and draw in the Implied Yield Curve

Why did markets react so vigorously to the December RBA meeting?

Source: Carl Capolingua

Ethereum Has Less Than 10% Chance of Tapping $5K by Year-End, Says Derive

Ether’s chances of reaching $5,000 by the end of the year have fallen by about 50%. Source: Derive.xyz

“TradFi is gobbling up cheap ETH” — trader

Ether was trading at $3,661 at the time of publication. Source: CoinMarketCap

Ether new all-time high call within the week

Source: Cointelegraph

Sticky US Inflation Points to a More Cautious Fed in 2025

Inflation remains too hot for comfort

US core CPI metrics

Fed to cut more cautiously from now on

Source:ING

Trudeau Says Canada 'Will Respond' if Trump Imposes 25% Tariffs

Source: TheFinancialPost

Yellen Spoke With Bessent After Nomination, Has Fiscal Regrets

Fed Independence

Source: Viktoria Dendrinou

The US 10yr Heads Back to 4%, But then it’s 5%+ for 2025

The US 10yr should settle above neutrality, heading for 5%+

The noughties as a neutral reference?

The difference between the 2yr and the 10yr is that the latter is far too low

Deficit pressure, tax cuts and tariffs are all issues for longer rates to worry about

We like structural fixed-rate payers and short duration positioning for 2025

Source:ING

Gold Rally Stalls With Markets Calm Ahead Of The Us Cpi Release

Daily digest market movers: Gold rally stalls as US Dollar firms up

Technical analysis: XAU/USD consolidates gains right below $2,700

Source: FXSTREET

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