First rate cut to occur in mid-2025, KPMG predicts

In its Australian Economic Outlook, KPMG says the Australian economy is growing at its slowest pace for 33 years and has been propped up by government spending.

Despite the significant slowdown in growth, the firm said it did not expect the Reserve Bank to cut interest rates until near midway through 2025. However, it did not rule out the possibility of an earlier rate cut.

The economic outlook noted that the futures market has already priced in three 25 basis points cuts to the cash rate through 2025, with a roughly 69 per cent chance of a rate cut at the RBA’s first meeting of the year in February.

Analysis of inflation by KPMG found that demand-driven factors were now contributing less to inflation than at any time in the post-COVID-19 period and were in line with normal settings.

"This suggests that the holding of the cash rate at 4.35 per cent since November 2023 has had the intended effect in curbing domestic demand," it said.

However, the report said that government cost-of-living packages had complicated the CPI calculation and created problems for policymakers.

In its latest CPI figures, the Australian Bureau of Statistics (ABS) noted that the 2024–25 Commonwealth Energy Bill Relief Fund rebates in all states and territories and state government electricity rebates in Queensland, Western Australia and Tasmania led to a 17.3 per cent fall in electricity prices in the September quarter.

"Without the rebates, electricity prices would have increased 0.7 per cent during the three months to the end of September 2025," KPMG said.

In addition, the maximum rate for Commonwealth Rent Assistance (CRA) increased by 10 per cent in September 2024 on top of the usual CPI indexation on 20 March and 20 September, partly offsetting the annual rise in rents which came in at 6.7 per cent in the 12 months to October 2025 instead of an 8.1 per cent rise for the same period.

"The mathematical consequence of these measures has been a rapid fall in headline CPI calculated over the second half of 2024, albeit the underlying inflation pressures as measured by the trimmed mean show price pressures being much stickier and declining more slowly," KPMG said.

"This is highlighted by the widening difference between headline and core inflation, which has blown out to around 1.0 per cent over the three months to November 2024."

KPMG said this raises an important question as to what would happen with the CPI calculation when cost-of-living relief packages end, given that the production cost of electricity and rental accommodation had not changed.

"It is just the payment sources for their costs to some households and small business that has [changed]," the report said.

KPMG said its prediction of a rate cut halfway through 2025 would also depend on how inflation reacts to the potential geopolitical risks associated with a new Trump administration in the US and the threat of an increased global tariff environment.

The report said these factors would only add to pricing pressure on imported goods.

Rising trade tensions and the uncertainty about future changes in trade policies "pose significant risks as they might disrupt supply chains, raise price levels and slow down economic recovery", the firm said.