Last updated: November 26th, 2024
The Reserve Bank of Australia (RBA) is responsible for preventing runaway inflation and creating conditions for ‘price stability’.
Official cash rate is RBA’s weapon of choice, which influences the interest rates offered by banks and other lenders.
If you’re a homeowner, property investor or prospective homeowner (see our latest Australian property update), 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 and early 2025.
| Key Takeaways: |
|---|
| RBA appears to be in a holding pattern, but its recent statements indicate it’s relaxed its tightening bias. |
| Most economists doubt rates will move downwards till 2025, but multiple rate cuts are expected. |
| Financial markets are also pricing in rate cuts in 2025 after weakening of the US economy and US rate cuts. |
| Persistent inflation and factors including labour market tightness, GDP growth and global volatility also pose upside risks. |
The RBA Will Not Make Aggressive Cuts This Year.
The official RBA cash rate rose by 25 basis points to 4.35% in November 2023, and has been left unchanged by the Reserve Bank of Australia (RBA) Board for eight meetings.
Given ongoing US recession fears and Australia’s sticky inflation and strong labour market in spite of weak economic growth, the hold was largely expected.
Important!
At its August meeting the RBA dashed hopes for rate relief within the next six months, and said a rate rise had been seriously considered.
November’s statement from the RBA has been interpreted as more neutral: the Board did not consider a hike or a cut, but:
Above: Australian housing affordability remains stretched due to elevated borrowing costs.
The central bank’s language in June shifted to a renewed focus on upside risks to inflation and a heightened state of uncertainty.
Its statements in August, September and November all contained a warning that:
At its September meeting, the RBA doused optimism about inflation that had arisen from August’s monthly CPI number dropping down into target range at 2.7%.
Since then, the September quarter CPI data was released by ABS showing core inflation fell to 2.8%.
The Board’s November meeting minutes show they discussed several scenarios that could lead to a change in interest rate:
- If consumption grows or weakens more than expected, in the wake of consumer sentiment, growth in real income, tax cuts and other government subsidies that started in July.
- If unemployment lifts more sharply than expected, lowering inflation more rapidly.
- If aggregate supply (output of goods and services) was lower than expected or productivity growth doesn’t pick up.
Changes in US economic policy driven by Donald Trump and the impact of Chinese government stimulus were discussed as key risks — although “largely unpredictable” for now.
(Related: Why Is Cost Of Living In Australia So High?)
RBA Governor Michele Bullock said vigilance on inflation, without impacting the economy, was key to helping Australians doing it tough due to increased cost of living and the current per capita recession:
Central forecasts were updated in November, with inflation now expected to drop to 2.6% by Christmas.
However core inflation (trimmed mean) won’t hit the 2-3% target range until mid-2025.
Above: The monthly CPI indicator has alarmed the market by rising to 4.0% in May, but backed off to 2.7% in August.
Many people breathed a sigh of relief when the June quarter Consumer Price Index (CPI) figures didn’t exceed forecasts. A within-target monthly result for August also lightened the mood.
Plus, the headline inflation result for the September quarter came in under 3%.
In particular, the US Federal Reserve’s decision to cut rates by 50 basis points in September, and a further 0.25% in November, has put the RBA under more political pressure to cut.
- Financial markets were pricing in four rate cuts here within 12 months starting in February 2025, following the Fed’s rate cut and prior to the RBA’s November decision.
- Bloomberg reports that rates traders pushed back the expected timing of the first RBA cut from February to April, following strong employment data in October.
- Interest rates on fixed loans have been reduced by a growing number of banks and other lenders in October, by an average of 0.3% in anticipation of cuts next year.
- Sentiment scans show consumers are no longer fearful that the RBA will raise rates. Over half now expect mortgage rates to be unchanged or lower over the year ahead.
Currently, the implied yield curve from Australia's cash rate futures market shows investors expect cuts to be delayed till May, and just two cuts throughout 2025.
The US had been struggling with ‘last mile’ inflation earlier in 2024, but higher-than-expected unemployment figures forced the Fed to move.
Did you Know?
Prices across the US rose 0.4% in February, March and April. They remained unchanged in May, and declined 0.1% in June, but rose again in July, August and September.
Independent economist Saul Eslake told NewsWire that when the RBA does cut (he thinks in February), it might be a larger 50 basis point reduction:
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 2025.
Of the 38 economists surveyed by Finder in November:
- 78% expect a cut in one of the first three RBA meetings of ‘25;
- Three in four think the recent rate cutting in NZ and the US won’t increase the odds of RBA making a move.
Current interest rate forecasts from Australian banks include:
| Q4 2024 | Q2 2025 | Q4 2025 | |
|---|---|---|---|
| Westpac | 4.35 | 3.85 | 3.35 |
| NAB | 4.35 | 3.85 | 3.35 |
| ING | 4.35 | 3.85 | 3.35 |
| CBA | 4.35 | 3.60 | 3.10 |
| ANZ | 4.35 | 4.10 | 3.60 |
Important!
All of the 'big four' banks have now pushed back forecasts of a 0.25 basis point cut arriving from 2024 to 2025.
As of 5 August, Westpac was predicting a cash rate cut by December 2024 but following the RBA’s hawkish stance, its chief economist Lucy Ellis said:
ANZ changed its forecast in June — and NAB pushed back its estimate after the May CPI indicator result.
More recently, both Westpac and NAB also changed their view on the timing of the first cut, from February to May:
As of October, Commbank was sticking to its case that a cut would come this year but revised the timing to February 2025 after the quarterly CPI result:
OECD’s long-term interest rates forecast for Australia also predicts a decline in rates throughout 2024-25, with rates hitting the 3.1% 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.
Expert Tip.
“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 2.8 from the cash rate of 4.35 puts real interest at 1.55%.
Investment portfolio manager Ashley Owen shared his analysis of Australia’s rates and inflation compared 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 2025)?
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.
Above: Real incomes are starting to stabilise after 18 months of sharp decline.
In its latest monetary policy statement, the RBA noted that labour market conditions are moving toward balance, but conditions are still tight and productivity is weak:
Important!
High employment levels can pressure employers to raise wages to compete, fuelling inflationary pressure without a sustainable lift in living standards.
According to ABS labour force data, unemployment was below 4% in seasonally adjusted terms for the first three months of 2024.
The unemployment rate reached 4.2% in both July and August.
Experts believe the job market will weaken further, and the RBA’s November forecasts predict unemployment will rise to 4.3% by December 2024.
Did You Know?
Full employment doesn’t mean 100% of Australians work. In fact, there’s no defined numerical target for what constitutes full employment. The RBA assesses the maximum level required to maintain stable inflation.
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.
Expert Tip.
For instance, rather than cutting back, a person might make a big purchase now to avoid the expectation of having to pay more in future.
A major concern from 2023 was whether rising property prices and income from interest and savings buffers would mean household spending remained robust.
CoreLogic data shows annual growth in housing prices reduced from a high of 9.7% earlier in the year to 6.7% over the 12 months to September 2024.
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 June quarter 2024, released 4/09/24) shows the economy rose just 0.2% from the previous quarter. That represents an annual rise of 1.0%.
Above: Aggressive rate hikes have taken a toll, with the Australian economy cooling and bolstering the case for rate cuts in early 2025.
The RBA Board said GDP growth in the June quarter was in line with expectations, but was expected to pick up. Despite weaker-than-expected consumption, the Board judged:
In May 2024, the RBA’s forecast for growth, was a 1.6% GDP for December 2024 and 2.1 by mid-2025 - which was revised up to 1.7% and 2.6% in the RBA’s August outlook.
Its November forecast puts growth at 1.5% by December and 2.3% in June 2025.
The outlook reflects:
- A cash rate that’s assumed to remain higher for longer.
- Subdued household spending but stronger public spending and population growth.
- Easing labour demand through lower job vacancies and fewer average hours worked.
- A weaker than anticipated outlook on productivity growth but moderating unit labour costs.
- High construction costs and ongoing roadblocks due to a lack of skilled workers.
- A drop in business and public investment from high rates seen over recent years.
- An expected slowdown in China’s economy, due to the continued weakness in its property sector.
The RBA did revise up its GDP growth estimate for China, based on stimulus announcements, but notes it's unclear whether this will boost domestic growth.
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:
| Australia | US | England | Canada | EU | |
|---|---|---|---|---|---|
| Current | 4.35% | 4.50-4.75% | 4.75% | 3.75% | 3.25% |
| 1 Year Ago | 4.35% | 5.25-5.50% | 5.25% | 5.00% | 4.50% |
Of the major economies’ central banks, Canada’s was the first to begin monetary policy easing, cutting its cash rate by 25 basis points at its June 5th meeting.
Then on June 12, the European Central Bank dropped its interest rate by 25 basis points too — taking its rate to 3.75%. It cut rates again in September and October.
Important!
With UK inflation falling within the target range in May, the Bank of England cut its cash rate by 25 basis points in August from a 16-year high. It cut a further 0.25% in November.
Hopes of a rate-cutting cycle beginning as early as March 2024 in the US were dashed due to four straight months of increasing inflation at the start of 2024.
The US Federal Reserve held rates for an ninth straight time at its meeting in August.
An incredible sell-off across global stock markets was triggered as the data flagged the potential for a US recession.
Market losses were exacerbated by investors scrambling to exit carry trades and derivative positions in Japan after the yen appreciated in value — on the back of the Bank of Japan lifting interest rates to 0.25%.
There was talk of an inter-meeting rate cut to stave off the risk of recession.
Important!
That didn’t eventuate — but the Federal Reserve did deliver a whopping 50 basis point cut at its September meeting.
The Fed eased again in November by 0.25%, but Chair Jerome Powell said recently that gradual easing was in the pipeline, with the speed dependent on the data.
Recent indicators the Fed will use to determine the need for future cuts include:
- A 0.2% increase in prices in October, following an increase of 0.2% in September, for an annual inflation figure of 2.6%.
- A declining unemployment rate, falling from 4.3% in July to 4.2% in August and 4.1% in both September and October.
- Steady consumer spending, with second quarter GDP figures coming in at a higher-than-expected 3%, and 2.8% in Quarter 3 based on the 'advance' estimate.
Senior investment strategy director for U.S. Bank Asset Management, Rob Haworth said in October:
However, borrowing is still expensive and the world’s largest economy could also face turbulence arising from policies enacted by President-elect Donald Trump in the new year.
For instance, the potential for Trump’s proposed tariffs to 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.
Important!
Fiscal policy is also vital — how the elected government intervenes to grow the economy or curtail/encourage consumption, such as through taxation, investments and initiatives.
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 0.3 percentage points to GDP growth.
Rises in government expenditure were attributed to health programs through Medicare and the Pharmaceutical Benefits Scheme, and energy bill relief payments by some state governments.
Upcoming changes to stage 3 tax cuts are estimated to add just 0.1% to inflation.
Expert Tip.
Electricity bill credit of $300 for all Australians announced in the May budget are expected to shave off a few percentage points from the CPI.
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%.
Important!
The RBA implemented an unprecedented 12 consecutive interest rate rises that kicked off in May 2022 after 16 months of the rate sitting at 0.10% since November 2020.
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 rate increase in November 2023 took the run of rises to 13.
Important!
Currently inflation is at 3.8% (reflecting price rises in the 12 months from June 2023 to June 2024), with the most significant rises attributed to rent, housing, food, fuel, insurance and healthcare.
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 won't begin until 2025.
Warnings are still sounding in some circles about the need for rates to move higher to squash inflation — and conversely, the risk of waiting too long to cut, especially if the US doesn’t achieve a soft landing.
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
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.