The RBA Is Not Likely To Cut Rates Until 2025

Wary of upside risks to inflation, the RBA kept the official cash rate at 4.35% during its June meeting. It was the fifth consecutive hold, but RBA Governor Michelle Bullock admits a rate rise was considered.

A discouraging inflation print for the March 2024 quarter seems to have delayed monetary easing, with RBA Governor Michelle Bullock highlighting how the “pace of decline has slowed”, meaning the path to the 2-3% target was “unlikely to be smooth”.

A shocking 4.0% rise in the monthly CPI for May has reinforced doubts over cuts, and belief that a hike will come.

Australia’s major banks are now split on whether the RBA will start cutting interest rates in late 2024 or not until 2025.

A number of other economists think a rate rise before the end of 2024 is likely.

Economists Embrace Higher-For-Longer Reality.

A higher-then-expected monthly CPI indicator figure for May—released on June 26 by the ABS—has shaken up the market and led to revisions in rate cut predictions.

Earlier in June, Commonwealth Bank’s head of Australian economics, Gareth Aird, said the bank still sees an easing cycle starting in late 2024, as it predicts unemployment will climb higher than the RBA has forecast.

He acknowledges the increasingly narrow path to target inflation could change things:

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

Commbank had previously predicted easing would start in September, but revised its outlook in April, based on Q1 inflation data and a lower-than-anticipated unemployment rate.

Westpac chief economist Besa Deda said the bank remained comfortable with its prediction that rates would be cut in November, due to its belief that inflation would ease faster than the RBA thinks.

Meanwhile:

Government Spending In Spotlight But Services Inflation Key.

The 2024 Federal Budget delivered on Tuesday, 14 May, has raised concerns for the RBA.

RBA Governor Bullock said: “Recent budget outcomes may also have an impact on demand, although federal and state energy rebates will temporarily reduce headline inflation.”

The budget added billions in extra spending — injecting more cash into people's pockets and the broader economy.

Treasurer Jim Chalmers said at a media conference following the RBA decision that the rate rises that are already in the system were “hammering the economy.”

He said government policies had helped moderate inflation since the peaks of 2022 and expected that to continue as cost-of-living relief measures from the budget kicked in from July.

Of the major upside risks though, the RBA described stubborn services inflation as “a key uncertainty.” It’s also watching high labour unit costs and wants to see productivity growth pick up.

AMP’s chief economist, Shane Oliver, previously thought the RBA would find the confidence to cut by year-end. He’s changed his view to monetary easing starting February 2025:

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

The RBA Continues To Be 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 its statement following the RBA’s decision to hold rates at 4.35% in June 2024, the central bank said the pace of decline in inflation had slowed and was “proving persistent.”

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 June 26, 2024, trading of cash rate futures contracts indicated a considerably higher 37% expectation of an interest rate increase to 4.60% at the next Reserve Bank board meeting (that is, a 63% 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, education, and health, which all rose in the 12 months to March 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.

Insurance premiums saw the largest ever annual price increase in 23 years.

The next important gauge in 2024 will be the June 2024 quarter CPI figures, which the ABS will release on July 31.

Additionally, Governor Bullock noted that services inflation remains persistently elevated — an ongoing concern for the central bank.

2. GDP Growth.

Recent National Accounts data from the ABS shows:

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

While investment slowed, Katherine Keenan, ABS head of national accounts, said that while growth was weak, government spending at all levels and increased imports added to GDP growth.

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).

But its budget delivered in May 2024 was widely regarded as inflationary by adding up to $20 billion in spending in 2024-25 and 2025-26.

3. Unemployment.

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

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 May 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  later in 2024.

Above: Real income growth is expected to lift in the second half of 2024.

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.

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

More than a third of respondents expect ‘bad times’ for the Australian economy, with just 9% expecting ‘good times’ ahead.

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.

An apparent flare-up of inflation in the US, whose economy is also growing more slowly, has added to the RBA’s cautiousness.

It likely wants to avoid having to reverse stated intentions of rate cuts — as the US Federal Reserve has now been forced to.

US Federal Reserve Chair Jerome Powell said in March:

Three cuts in 2024 were still on the cards then, but the Fed now thinks just one may be possible after the US CPI rose in both March and April.

The CPI was unchanged in May, but Powell said at the Fed’s June meeting — where the bank decided to hold rates — that rate reductions wouldn’t happen until the economy sends a clear signal.

The US and the UK pushed rates higher than Australia in 2023 to curb inflation, and many felt their efforts would pay off.

Expectations of imminent interest rate cuts have diminished in both the US and the UK.

Both central banks held rates at their most recent meetings — both are waiting to feel more confident that inflation is on a sustainable downward trend.

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