Interest Rate Forecast Australia: Will Rate Hikes Stop In 2024?

The Reserve Bank of Australia (RBA) is responsible for preventing runaway inflation and creating conditions for’ price stability’. The RBA’s mechanism of choice is the official cash rate, which influences the interest rates offered by banks and other lenders.

If you’re a homeowner, property investor or prospective homeowner, you’ll be worried about higher rates reducing your borrowing power or increasing your loan repayments.

As an equity investor, you’ll be attuned to the effects of RBA rate changes on the value of your stock portfolio.

So, let’s forecast interest rates in Australia for the rest of 2024.

The RBA Will Struggle To Make Aggressive Cuts This Year.

The official RBA cash rate rose by 25 basis points to 4.35% in November 2023, and was left unchanged by the Reserve Bank of Australia Board in December last year.

The Board has held the policy rate at 4.35% at its two meetings in 2024 so far, on February 6 and March 19.

 Are we likely to see a drop at the next meeting in May?

Above: Australian housing affordability remains stretched due to elevated borrowing costs.

Well, the central bank hasn’t ruled out further tightening of rates in 2024 but is waiting to see how recent rate rises, other macroeconomic data, and developments in the global economy play out.

(Related: Why Is Cost Of Living In Australia So High?)

RBA Governor Michele Bullock has said that inflation has passed its peak but was still too high — as evidenced by stubbornly inflated service costs  due to “strong domestic cost pressures, both for labour and non-labour inputs.”

 Above: The final stretch to bring inflation back to target is proving challenging. The monthly CPI indicator remained at 3.4 between December 2023 and February 2024, then increased to 3.5 in March ‘24.

Higher-than-expected quarterly Consumer Price Index (CPI) figures released in April 2024 show that prices aren’t moderating as quickly as hoped.

Compared to a 4.1% rise in inflation in the December ’23 quarter, the March ’24 quarter revealed annual price increases of 3.6%.

Head of macro research at Deutsche Bank AG in Sydney, Tim Baker, said Australia’s CPI result “has shades of the last mile inflation problems plaguing the US.”

The continued weight of inflation on people’s spending habits has spurred fears of inflation becoming entrenched — which casts doubt on rate cutting, and makes rate hikes more likely.

Warren Hogan, chief economic adviser for Judo Bank, says an upward adjustment to a cash rate of 5.10% may be required for the RBA to stay on-target.

Investment expert and former RBA staffer, Christopher Joye said despite financial market optimism, recent CPI data had “humiliated” Australian and US central banks.

Westpac’s Chief Economist Luci Ellis said earlier in 2024 that no further rate rises were needed to subdue aggregate demand.

The bank has since pushed back its expectation of when the RBA will reduce rates from late-September to after its November meeting.

Australia’s 5-Year Official Cash Rate Outlook.

While more short-term rate hikes  are possible, major Australian banks and many leading economists are saying rates will hold before starting to move downwards  in late 2024, or even into 2025.

Current interest rate forecasts from Australian banks include:

ANZ chief economist Richard Yetsenga said rate cuts would likely start in November.

OECD’s long-term interest rates forecast for Australia also predicts a decline in rates throughout 2024-25, with rates hitting the 3.4% mark by the end of 2025.

Above: OECD’s projected cash rate compared with that of G7 economies.

The OECD forecast is based on the projected values of government bonds maturing in 10 years and an overall assessment of the economic climate.

A number of pundits have previously said that hawkish monetary policy would continue as long as ‘real’ interest rates were in the negative.

Because inflation rates are above interest rates, a few pundits have argued that successfully reining in inflation may require cash rate increases that put Australia’s ‘real’ interest rate into positive territory.

Investment portfolio manager Ashley Owen shared his analysis of how Australia’s rates and inflation compare to other countries in October 2023. He posited that achieving a real interest rate of 2% would require a cash rate of around 4.5 – 5%.

(Related: Will Australia Go Into A Recession In 2024)?

How Does The RBA Cash Rate Affect Your Mortgage Repayments?

If you’re one of thousands of Australian mortgage holders waiting for relief on your home loan repayments, the table below shows how predicted interest rate cuts will improve your cash flow*.

*We crunched the data by averaging the interest rate forecasts from major Australian banks and applying the change to a 25-year, principal-and-interest, 6.59% variable rate loan. The interest rate forecasts were rounded to the nearest quarter of a percentage and repayments are monthly.

4 Economic Factors That Could Impact Rate Cuts.

The RBA describes the economic outlook as “highly uncertain”, and downside risks could emerge in 2024 that would see tightening back on the agenda.

Here’s what to watch: 

1. Unemployment And Wages.

It’s yet to be seen whether an expected (though moderate) rise in unemployment will financially impact households and the broader economy in 2024 and the following years.

In its latest monetary policy decision, the RBA noted that labour market conditions “remain tighter than is consistent with sustained full employment and inflation at target.”

Unemployment increased in seasonly adjusted terms, according to ABS labour force data for March 2024—to 3.8%. Experts believe the job market will weaken further, and the RBA’s February forecasts predicts unemployment will rise to 4.2% by June 2024.

2. Consumer Sentiment And Behaviours.

The RBA has repeatedly warned of the dire consequences of not returning to target inflation levels quickly enough.

In particular, if high prices become entrenched in ordinary people’s day-to-day expectations, even higher interest rates could be needed to reduce inflation down the track.

A major concern from 2023 was whether rising property prices and income from interest and savings buffers would mean household spending remained robust.

3. GDP Growth.

A robust economy, supported by GDP growth, helps create a case for lowering interest rates.

The Australian economy’s growth has slowed down.

The latest National Accounts data from the ABS (for the December quarter 2023, released 6/03/24) shows the economy rose just 0.2% from the previous quarter.

Above: Aggressive rate hikes have taken a toll, with the Australian economy slowing and bolstering the case for rate cuts in late 2024.

In its Statement on Monetary Policy issued November 2023, the RBA stated:

But in February 2024, the central bank revised its outlook for GDP growth up to June to 1.3% — down from a projection of 1.8% made three months prior.

The softer outlook reflects:

4. Global Volatility.

Domestic factors are naturally impacted by major downturns, conflicts or catastrophes globally that impact our terms of trade and the cost of imported goods.

Our economy is especially exposed to the risk that the Chinese economy’s performance will deteriorate further given its stressed property market and high youth unemployment rate.

Supply-side, the price of fuel, food and other goods locally could rise further depending on conflicts in Ukraine and the Middle East.

How Are Global Interest Rates Changing?

Here’s how our central bank’s policy rate compares to other major economies:

Reuters reported in September 2023 that large central banks globally were united in their aim to curb inflation by keeping rates high for as long as needed — but quoted a prediction from Capital Economics that,

Slowing US inflation in late 2023 sparked hopes of a rate-cutting cycle beginning as early as March 2024. But the narrative has shifted given three straight months of increasing inflation in 2024.

The US Federal Reserve held rates for a fifth straight meeting in March, and on the back of March’s inflation print, some parts of the market are now pricing in a rate hike.

Given that The Fed’s inflation target is 2%, they’re keen for more evidence that’s achievable before acting. Recent indicators include:

Federal Reserve Chair Jerome Powell would only commit to saying cuts would happen “at some point this year”.

The world’s largest economy could also face turbulence arising from the Biden Vs. Trump presidential election.

High costs of borrowing for longer make for unhappy voters, but the use of stimulus to attract votes could fuel intractable US inflation — which has flow-on effects globally.

What About Fiscal Policy?

Monetary policy is not the only tool to combat inflation and, therefore, influence rates.

A recent opinion piece from the Australian Financial Review argues that upward inflationary pressure is coming from higher government structural spending and subsidies in recent years.

In particular, subsidies designed for cost-of-living pressures were criticised as potentially encouraging spending, the same way stimulus cash does.

Former RBA board member Warwick McKibbin was quoted as stating:

The recent ABS National Accounts data shows that government spending contributed 0.1 percentage points to GDP growth.

Previously, subsidy relief for households to cover electricity and childcare costs added to GDP growth.

More recently, rises in government expenditure were attributed to health programs through Medicare and the Pharmaceutical Benefits Scheme.

Upcoming changes to stage 3 tax cuts are estimated to add just 0.1% to inflation.

What Is RBA’s Historical Monetary Policy?

Australia’s cash rate spiked to one of its highest points of 7.5% in 2008, at the height of the Global Financial Crisis.

More recently, amid uncertainty about the impact of the COVID-19 pandemic — which first became widespread within Australia in early 2020 — the cash rate was lowered to bolster the economy.

However, as inflation started picking up, the RBA moved to start normalising interest rates again.

The RBA Governor at the time, Philip Lowe, said:

In particular, Australia’s property market saw record-breaking price increases, and supply disruptions from the pandemic and the Russia-Ukraine conflict also reduced Aussies’ purchasing power.

Inflation hit a 30-year high at the end of 2022, reaching 7.8%.

Prior to those hikes, interest rates hadn’t been over 4% for more than 11 years (since April 2012 when the rate was 4.25%).

The recent rate increase in November took the run of rises to 13.

Final Thoughts On Australia’s Interest Rate Forecast.

There are too many variables and unknowns to reliably predict interest rates over the coming five years in Australia, but the consensus among economists is that a modest easing cycle will begin later in 2024 and continue into 2025.

Warnings are sounding both domestically and across our key trading partners — such as the US — about the need for rates to stay higher for longer to squash inflation.

Former US Secretary of the Treasury Larry Summers said in April: “You have to take seriously the possibility that the next rate move will be upwards rather than downwards.”

What does it mean for your property purchasing or investment plans? Some would argue the best time to buy or invest is simply when you can afford it.

A best practice tip for anyone securing a home loan is to always budget for higher than the minimum repayments to allow for the inevitable changes in interest rates.

Jody