Last updated: June 27th, 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 (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.
| Key Takeaways: |
|---|
| RBA appears to be in a holding pattern, but its recent statements indicate a return to a tightening bias. |
| Views among economists are mixed. Some see rate cuts from December 2024, a growing number doubt rates will move downwards till 2025, and other forecast rate rises. |
| Financial markets moved to suggest a 50-60% chance of an imminent rate hike after May’s monthly CPI indicator data. |
| Persistent inflation and factors including labour market tightness, GDP growth and global volatility also pose upside risks. |
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 has been left unchanged by the Reserve Bank of Australia (RBA) Board for five meetings, including the most recent one on June 19.
However, several pundits suggest the next meeting in August will be a ‘live’ one — in other words, we could see a change.
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.
It hasn’t ruled out further rate tightening in 2024 but is waiting to see how domestic demand, 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 said recent mixed data has reinforced the need to remain vigilant on inflation:
Central forecasts were for inflation to return to the target range of 2–3 per cent in the second half of 2025, and to the midpoint in 2026.
Above: The final stretch to bring inflation back to target is proving challenging. The monthly CPI indicator has been increasing since March and alarmed the market by rising to 4.0% in May.
Higher-than-expected quarterly Consumer Price Index (CPI) figures released in April and May 2024 have deepened fears that inflation isn't moderately quickly enough.
May’s inflation figure came in at 4.0%, which was above forecasts of 3.8%, and the highest it’s been in five months.
The market quickly priced in a potential interest rate hike:
- Bond yields rose as traders factored in a 50% probability of monetary policy tightening at the RBA’s next meeting in August.
- Futures trading reveals investors don’t see a rate reduction on the cards until May 2025 at the earliest.
However, once volatile items are removed the monthly inflation actually fell 0.1%. So, the RBA will be keen to see how inflation is trending when the next quarterly result is issued in July.
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.”
Did you Know?
Prices across the US rose 0.4% in February and March, reflecting a 3.5% annual rise. Inflation increased 0.3% in April and was unchanged in May, bringing the annual change to 3.3%.
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 stimulatory spending by the Australian Government would remove the shackles on the domestic economy.
This could force multiple to a cash rate closer to 5.00% 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.
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.
Of the more than 40 economists surveyed by Finder in June:
- 44% think rate cuts will happen this year;
- 38% predict we’ll need to wait until 2025; and
- 18% believe monetary easing won’t occur before July 2025.
Current interest rate forecasts from Australian banks include:
| Q4 2024 | Q2 2025 | Q4 2025 | |
|---|---|---|---|
| Westpac | 4.10 | 3.60 | 3.10 |
| NAB | 4.35 | 4.10 | 3.60 |
| ING | 4.35 | 3.85 | 3.60 |
| CBA | 4.10 | 3.60 | 3.10 |
| ANZ | 4.35 | 4.10 | 3.60 |
Important!
Of the ‘big four’ banks, NAB and ANZ are not in agreement that a 0.25 basis point cut will arrive in the final quarter of 2024. ANZ changed its forecast in June — and NAB pushed back its estimate after the May CPI indicator result.
ANZ head of Australian economics, Adam Boyton said:
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.
Expert Tip.
“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 3.6 from the cash rate of 4.35 puts real interest at 0.75%.
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 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*.
| Amount Owed | Repayment (Q2 2024) | Repayment (Q4 2024) | Repayment (Q2 2025) | Repayment (Q4 2025) |
|---|---|---|---|---|
| $500,000 | $3404 | $3249 | $3173 | $3023 |
| $1,000,000 | $6808 | $6498 | $6346 | $6046 |
| $2,000,000 | $13616 | $12996 | $12698 | $12092 |
Important!
By the end of next year, expect your repayment to reduce by about $800 per month for every million you owe to the bank.
*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.
Above: Real incomes are starting to stabilise after 18 months of sharp decline.
In its latest monetary policy decision, the RBA noted that labour market conditions “eased further over the past month but remain tighter than is consistent with sustained full employment and inflation at target.”
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 4.1% in April and was 4.0% in May.
Experts believe the job market will weaken further, and the RBA’s May forecasts predict unemployment will rise to 4.2% 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 9.4% over the year to February to 8.3% over the 12 months to May 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 March quarter 2024, released 5/06/24) shows the economy rose just 0.1% 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:
- A cash rate that’s assumed to remain higher for longer.
- Households reducing spending more than expected, with a recovery in spending expected to take longer.
- 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.
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% | 5.25-5.50% | 5.25% | 4.75% | 3.75% |
| 1 Year Ago | 4.10% | 5.25-5.50% | 5.00% | 4.75% | 3.50% |
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 had been at a record-high of 4.00% since September 2023.
Important!
With UK inflation falling within the target range in May, there are hopes that the Bank of England could start cutting rates in Q3 2024.
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 a seventh straight time at its meeting in June, and indicated the potential for just one cut in 2024.
Given that The Fed’s inflation target is 2%, they’re keen for more evidence that’s achievable before acting. Recent indicators include:
- A 0.3% rise in prices in April and no change in May, for an annual inflation figure of 3.3%.
- A tight but cooling jobs market, with unemployment low but rising from 3.8% in March to 3.9% in April and 4.0% in May.
- Moderating consumer spending, with slower GDP growth reflected by a drop in household spending.
Federal Reserve Chair Jerome Powell said one cut this year was possible but the timing is “going to be data-dependent.”
Important!
The Fed’s forecasts show up to four cuts pencilled in throughout 2025 despite Powell’s description of the “sometimes bumpy road” to easing inflation.
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.
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 0.2 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, in early 2024, inflation is at 3.6% (reflecting price rises in the 12 months from March 2023 to March 2024), with the most significant rises attributed to rent, housing, insurance and education.
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
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.