Australian Bond Exchange Weekly Update
7th February 2025
Key points
- Australian inflation at 3.2% fuels RBA rate cut expectations
- U.S. bond yields see volatility amid inflation data and tariffs
- ECB and BoC rate cuts signal global easing trend
Global Cash Rates & Inflation
- Australian inflation dropped to 3.2% in the December quarter, increasing the likelihood of an RBA rate cut.
- The US cash rate (policy rate) is currently between 4.25%-4.50%pa and the annual inflation rate in the year to December is 2.9%.
- The Bank of England Bank Rate currently sits at 4.75%pa to fight an inflation rate of 2.5% in the year to December.
- The European Central Bank Cash Rate (deposit facility) is 2.75%pa, to fight an annual inflation rate of 2.4% in the year to December.
- The Bank of Canada (BoC) also cut rates this week, continuing its policy of monetary easing in response to economic indicators.
Australian Inflation Eases Further
Speculation has been growing around whether the Reserve Bank of Australia (RBA) will cut interest rates at its upcoming meeting on February 18. Following the latest inflation data, major banks—including ANZ, Commonwealth Bank, and Westpac—have revised their forecasts, now expecting a rate cut. Market pricing currently reflects a 92% probability of this happening.
The bond market has responded accordingly, with yields on Australian government bonds trending lower. This week, the 10-year bond yield declined in anticipation of lower rates, which could encourage borrowing and investment.
While unemployment ticked up slightly to 4% in December, the labour market remains strong, leading some to question the urgency of an immediate rate cut. However, expectations still lean toward a reduction in February.
Federal Reserve Holds Rates Steady
On January 29, the U.S. Federal Reserve opted to keep its key interest rate unchanged at 4.25%–4.50%. This follows three consecutive rate cuts at the end of 2024, signalling a pause to evaluate inflation trends.
Bond yields in the U.S. have been volatile, reflecting market concerns over President Trump’s tariff policies. Investors are weighing the potential for both inflationary pressure and economic growth risks stemming from these trade measures.
Rate Cuts from the Bank of Canada and European Central Bank
The Bank of Canada lowered its policy rate by 25 basis points to 3%, citing concerns that U.S. tariffs could contribute to persistent inflation. As a result, the bank slightly raised its inflation forecast for 2025 from 2.2% to 2.3%.
The European Central Bank (ECB) also cut interest rates by 25 basis points, bringing its key deposit rate to 2.75%. Further reductions are expected throughout 2025 as the ECB seeks to support economic stability.
Navigating Market Uncertainty
With central banks providing little clear guidance on the path of future rate cuts, market uncertainty remains high. Given these conditions, a cautious approach to investing may be prudent.
*Data accurate as at 07.02.2025
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