The RBA is expected to cut rates on Tuesday. Will Australia enter a new economic era, and what happens if it doesn’t?

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The Reserve Bank of Australia is tipped to lower the official cash rate on Tuesday, which is expected to give mortgage holders a bit of relief from high interest repayments at last.

But central-bank observers are warning people not to expect a flood of cuts, considering ongoing worries about inflation and the impact of Donald Trump's tariffs.

Will the Reserve Bank of Australia lower interest rates?

In December, when it said it was "gaining some confidence that inflation is moving sustainably towards the target".

Got the majority of economists to either confirm or bring forward their rate-cut forecasts to 18 February. Economists from the four major banks are all tipping the RBA to cut rates by 25 basis points on Tuesday.

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The wider market is factoring in a 90% likelihood of a decrease in the cash rate on Tuesday, as indicated by the ASX's rate indicator, which monitors market expectations via cash rate futures contracts.

No more excuses: it's time for the RBA to chop interest rates | Greg Jericho

But many economists, including those tipping a cut, believe the chances of it happening are a bit too high.

RaboBank's researchers say that although they expect a cut on Tuesday, they don't think it's a "done deal".

"While we reckon the chance of a cut is higher than no change, we hold this view with low confidence and think the market's implied probability is overstating the strength of the argument for a cut at the February meeting," RaboBank said.

“We don't anticipate any further cuts at upcoming meetings, or for the slashing process to be particularly severe.”

The official cash rate has been stuck at 4.35% since November 2023, during a time of high inflation and rapidly increasing living expenses.

If there's no break, what happens?

There'll be fireworks if the RBA doesn't cut interest rates on Tuesday, given it would be a big change from what's expected.

This has happened before – specifically in April 2015, when the RBA kept interest rates steady despite widespread expectations of a rate cut.

The response at that time would be for the Aussie dollar to rise sharply, and it would likely do the same again on Tuesday if the RBA was to stand pat.

The risk of inflation flaring up again poses a challenge for them.

The real fireworks from a hold on rates would occur on the political stage, as it would give the Coalition the ammunition to argue that the Labor government hasn't managed inflationary pressures well enough to bring rate relief to home owners.

for the government heading into an election fought on competing cost-of-living issues.

Are we heading into a round of interest rate reductions?

ANZ has forecast two interest rate cuts this year, with one in February and another in August. The Commonwealth Bank has a "base case" of four cuts.

RaboBank is tipping three 25-basis-point cuts this year, but notes there's a "significant risk" if the RBA only delivers two of its own.

One of those risks is linked to the weak Aussie dollar, which has dropped from 69 US cents to about 63 US cents since last September. A lower dollar makes imports more expensive, a cost that's usually passed on to households and businesses buying everything from fuel and fertiliser to consumer goods.

Prof Fabrizio Carmignani from the University of Southern Queensland said US tariffs could also disrupt an anticipated cycle of interest rate cuts by potentially sparking another round of inflation.

“Fair dinkum, the real problem here is the US trade policy and the imposition of tariffs, and it's even worse if it leads to retaliation from other countries,” Carmignani said.

“When you start slapping on tariffs, ultimately the cost gets passed on to the consumer in the form of higher prices.”

Markets are bracing themselves for any escalation in trade tensions between Washington and Beijing.

Will rate cuts spark a new surge in the housing market?

Homeowners and potential buyers are often the ones who feel the biggest impact from rate settings, given the connection to mortgage repayments.

Sydney-based auctioneer Clarence White noted the market was finely balanced with "low-commitment, price-conscious" buyers.

“There's enough buyers out there who've been waiting for a move on rates that once they see those rates change, I reckon that'll boost confidence and we'll get most of those buyers off the fence,” said White, of Menck White Auctioneers.

“They'll pick up on the fact that it's time now.”

Fair dinkum, Labor's managed to keep the lid on inflation in an election year – but is anyone actually paying attention?

Australian property prices have been rocked in recent times by the opposing pressures of low supply and high interest rates.

Auction numbers have dropped by almost 14% compared to the same time last year across Australia's state capitals, which is usually a sign of a relatively quiet market.

Property valuer Gavin Hegney said that if it does come to be a cycle of interest rate cuts, people need to keep a close eye on the reasons behind it.

“Fair dinkum, if you slash interest rates and people are fearful of losing their job, the overall outcome is a wash,” said Hegney.

If you drop interest rates and people are really confident and optimistic about the future, then watch prices skyrocket.

“It’s the backdrop of falling interest rates that you need to pay close attention to.”