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

Can Australians breathe a sigh of relief?

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Last updated: February 21st, 2024

interest rate forecast australia

Last updated: February 21st, 2024

Reading Time: 8 minutes

Preventing runaway inflation and creating the conditions for ‘price stability’ is the remit of the Reserve Bank of Australia (RBA). The mechanism at their disposal 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.

(Related: Cost Of Living Trends In Australia For 2024)

Will Rates Go Up Or Down In 2024?

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.

At the RBA’s first meeting for 2024 on February 6, the Board once again left the policy rate on hold at 4.35%.

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

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.

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.”

“The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026,” Bullock said in February.

The weight of inflation on people’s spending habits means Australia is in the midst of a period of below-trend growth the RBA believes could continue for a while.

Westpac’s Chief Economist Luci Ellis said the bank believed no further rate rises were needed to subdue aggregate demand.

She believes further declines in inflation would give the RBA confidence that Australia was on track to return to the target range.

Australia’s 5-Year Official Cash Rate Outlook.

While more rate hikes in the short term may be less likely, most Australian banks and many leading economists are saying rates won’t start to move downwards again until mid-to-late 2024, or even into 2025.

Current interest rate forecasts from Australian banks include:

Q3 2024Q4 20242025
Westpac4.103.853.35 (Q2)
NAB4.354.103.60 (Q2)
ING4.354.103.85 (Q4)
NAB had previously predicted that rates would increase to 4.6% for most of 2024 before being cut in December. That’s been revised to reflect the anticipated maintenance of the current cash rate.

Important!

NAB is still saying cuts won’t come till December 2024.

In October 2023, Goldman Sachs changed its prediction on when rates would be cut from August ’24 out to November.

Andrew Boak at Goldman Sachs told the Australian Financial Review:

“We expect inflation pressures to trend lower, but the strong rebound in oil prices, depreciation in the Australian dollar, and resilience of wage-sensitive prices all suggest this will happen somewhat slower than previously.”

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.

Given the lower-than-expected CPI figure of 4.1 released in January 2024, we’re now in positive territory.

Given that 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.

Expert Tip.

“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 4.1 from the cash rate of 4.35 puts real inflation at 0.25%.

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

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.

An increase in Australians’ real income (income adjusted for inflation) is not expected to occur until mid-2024.

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

High levels of employment can pressure employers to raise wages to compete, fuelling inflationary pressure without a sustainable lift in living standards.

Did You Know?

Full employment doesn’t mean 100% of Australians in 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.

The psychological effects of higher prices matter, and can distort decision-making by both individuals and companies in ways that further embed inflation.

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.

However, home values have started to decline in many areas.

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 September quarter 2023, released 6/12/23) shows the economy rose just 0.2% from the previous quarter.

The RBA thinks business investment will continue to grow — largely underpinned by strong population growth — possibly leading to a lift in productivity.

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

“Business investment growth has been strong, reflecting a large pipeline of work and an unwinding of supply disruptions. Construction of government infrastructure projects has also contributed to the resilience in overall economic activity, with demand continuing to exceed available capacity in the sector.”

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.

(A modest 5% growth in economic activity is expected in 2024.)

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:

AustraliaUSEnglandCanadaEU
Current4.35%5.25-5.5%5.25%5.0%4.50%
1 Year Ago3.35%4.50-4.75%4.0%4.50%3.00%

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,

“By this time next year, we anticipate that 21 out of the world’s 30 major central banks will be cutting interest rates.”

US’ inflation has slowed in recent months, sparking hopes of a rate-cutting cycle beginning as early as March 2024.

Federal Reserve Chair Jerome Powell poured cold water on the idea during an interview in February, saying “the prudent thing to do” was to wait longer to see where inflation was heading, to avoid moving too soon. 

He confirmed that cuts would come—with an expected drop to a benchmark lending rate of 4.6% by the end of 2024.

“We’re just trying to pick the right time, given the overall context,” Powell said.

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:

“So far, policy has been to subsidise demand and leaving it again to the RBA as the last resort.”

The recent ABS National Accounts data shows that government spending contributed 0.2 percentage points to GDP growth, driven by subsidy relief for households to cover electricity and childcare costs.

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

Expert Tip.

The Government’s Mid-Year Economic and Fiscal Outlook, slashed some spending—largely by delaying infrastructure projects— in an effort to redress inflation, which also put the budget within striking distance of a surplus

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.

It was slashed back to 3.25% by the start of 2009. Since then, there have been various hiking and tightening cycles to keep inflation stable.

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:

“The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.”

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

Important!

Currently, in early 2024, inflation is at 4.1% (reflecting price rises in the 12 months from Dec 2022 to Dec 2023), with the most significant rises attributed to rent, housing, insurance and electricity.

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.

Inflation, the economy and unemployment domestically are also affected by a range of global factors, such as the growth of our trading partners and catastrophic events that can’t be foreseen.

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

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