The RBA Is Not Likely To Cut Rates Until 2025

Mindful of global inflationary trends, the RBA kept the official cash rate at 4.35% during its March meeting. Mortgage holders were given little insight into the future as the bank said it wasn’t “ruling anything in or out”.

The widely held view is that the RBA will start cutting Australia’s interest rates in late 2024.

Most major banks think cuts before September 2024 are unlikely.

Most Economists Expect Rate Cuts Soon.

CBA Chief Economist Stephen Halmarick said pointed out that despite challenges, including geopolitical risks and the US presidential election, the Australian economy looked in good shape for 2024.

Halmarick said the CBA thinks inflation will ease sooner than the RBA’s current forecast and reach 3% by the end of 2024.

Above: the RBA is prepared to pump brakes on rate cuts to ensure the inflation falls into the 2%-3% target range.

Meanwhile:

Speaking with AFR, he warned of the impact of weak productivity growth, house prices and government spending.

Prominent forecasts for the central bank’s cash rate include:

The RBA Is Vague On Rate Cuts.

In late 2023, Reserve Bank Governor Michele Bullock characterised Australia’s inflation as a “homegrown” problem, pointing to continued household spending on services like going to the hairdresser, dining out, and recreational activities.

In her statement following the RBA’s decision to hold rates at 4.35% in March 2024, Governor Bullock said inflation expectations remained consistent with the inflation target, and that higher rates were bringing supply and demand back down to a sustainable balance.

Of course, the Governor’s language about the likelihood of further rate hikes is vague. It depends on future economic data and how risks evolve.

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

What Is The RBA’s Next Move?

Based on market-determined prices in the ‘ASX 30 Day Interbank Cash Rate Futures’, the ASX publishes an RBA Rate Indicator that calculates the percentage probability of a change in the cash rate.

As of 26th March 2023, trading of cash rate futures contracts indicated a 5% expectation of an interest rate decrease to 4.10% at the next Reserve Bank board meeting (that is, a 95% expectation of no change).

(Related: Why Is Living In Australia So Expensive?)

Key Economic Indicators Influencing Australia’s Cash Rate.

What does the current economic data tell us about how interest rates might track?

1. CPI Inflation.

Keeping inflation in the 2-3% range is the RBA’s primary goal.

The most current data from the ABS shows that:

Pockets of high inflation persist, especially for housing, rents, insurance, electricity and fuel, which all rose in the 12 months to February 2024.

Rents and electricity would have seen even higher increases if it weren’t for government assistance measures.

Above: Australian rent prices are rising at the fastest rate since the GFC, hampering the Reserve Bank’s efforts to tame inflation.

Global oil prices also played a role in raising fuel costs.

Insurance premiums saw the largest ever annual price increase, since monthly CPI indicator records started.

The next important gauge in 2024 will be the March 2024 quarter CPI figures due to be released by the ABS on April 24. 

Additionally, Governor Bullock noted that while the monthly CPI update showed inflation remained steady, services inflation remains elevated— an ongoing concern for the central bank.

2. GDP Growth.

Recent National Accounts data from the ABS shows:

Above: Australian economy slowed to a crawl, but continues to defy rate hikes as exports drive growth.

National income data (seasonally adjusted) for the December 2023 quarter:

While investment slowed, Katherine Keenan, ABS head of national accounts, said: “Government spending and private business investment were the main drivers of GDP growth this quarter.”

On the household front, people spent more on essentials like electricity, rent and food but curbed spending on hotels, eating out, cigarettes and alcohol.

The Reserve Bank expects economic growth to remain below trend over 2024-2025 as higher rates weigh on consumer demand.

In fiscal policy, the Australian Government has made several budget cuts to help ease inflationary pressure, revealed in its Mid-Year Economic and Fiscal Outlook 2023-24 (MYEFO).

It found $9.8 billion in “savings and reprioritisations,” which comes from delayed infrastructure projects.

Although acknowledging economic growth would moderate due to inflation and higher interest rates, the Government stated:

3. Unemployment.

Higher interest rates put upward pressure on unemployment. As the price of money increases, the cost of borrowing hurts companies’ bottom lines.

Lay-offs can ensue.

While the number of employed Aussies is currently high, more people are working fewer hours and participation has lifted — possibly due to people returning to work by necessity to cover rising living costs.

Seasonally adjusted ABS labour force figures from February 2024 show:

A loosening labour market wouldn’t normally support further tightening of Australia’s interest rate.

Especially since RBA forecasts that growth in real incomes (salaries adjusted for inflation) won’t pick up until mid-2024.

Above: Real wage growth is back, and slightly earlier than forecast by Treasury.

4. Consumer Sentiment.

A major contributor to the nation’s economic growth is how everyday Australians spend their money.

Economists are keen to understand whether people feel financially flush and ready to buy, as a guide to likely reductions, or growth, in consumption.

Consumer sentiment was low throughout 2023.

Here’s what Australia’s two key consumer sentiment surveys indicate currently:

Nearly a third of respondents expect ‘bad times’ for the Australian economy, with just 10% expecting ‘good times’ ahead.

The survey found a softening buyer sentiment. Despite the cash rate hold in December, 40% of Australians surveyed expected mortgage interest rates to rise in 2024.

5. Global Economy.

How other major economies are faring influences Australia’s trade: the cost of our imports, the value of our exports, and the purchasing power of the $AUD for ordinary people.

Global growth is expected to slow over the next two years as nations emerge from a high-inflation environment.

Bloomberg reports that G-20 finance chiefs believe a soft landing was becoming more likely:

The general buoyancy of countries like the US and the UK also provides forewarning of global economic conditions that can buffet Australia.

The US and the UK also pushed rates higher than Australia in 2023 to curb inflation, and their efforts seem to be paying off.

Many pundits believe interest rates have now peaked in the US and the UK, and that cuts to the policy rate could be instituted as early as the first half of 2024.

Both central banks held rates at their most recent meetings in March 2024—both are waiting to feel more confident that inflations is on downward trend.

It may not be far off.

US Federal Reserve Chair Jerome Powell said in March:

Rate cutting in the US and the UK would make the greenback and pound less attractive to investors, which could boost the strength of the Australian dollar on the Forex market.

That should reduce the price of imports and further slow inflation domestically. 

Final Words On The Interest Rate Outlook For 2024.

How rates move in 2024 will depend on whether the RBA’s tightening cycle has done its job.

Has the inflation beast been slain, or will consumer demand, global turmoil and commodity prices continue to destabilise economies and push prices higher? Only time will tell.

Jody