RBA crushes hope of a 2024 interest rate cut
A few months ago there was widespread optimism that interest rates would be in retreat by Christmas but the RBA boss has emphatically dismissed that prospect as fanciful.
If you listen to the bond markets or Commonwealth Bank then there will be an interest rate cut by Christmas this year.
The other three big banks have revised their forecasts and pushed back expectations of a rate cut into 2025.
But the one voice that matters most is as adamant as her role permits that there will be no interest rate reprieve in 2024.
Michele Bullock, Governor, Reserve Bank of Australia, on Friday (16 August) did her best to quash expectations of an imminent downwards move for rates.
“Financial markets are still pricing in a rate cut by the end of the year,” Ms Bullock acknowledged.
“The Board’s message, though, was that it is premature to be thinking about rate cuts.
“Inflation is still too high and, in underlying terms, is not expected to be back in the top of the band until the end of next year.
“Circumstances may change, of course, and the outlook is uncertain but based on what the Board knows at present, it does not expect that it will be in a position to cut rates in the near term.”
With inflation unlikely to be where the RBA wants it until the end of 2025 – not 2024 – a rate hike would seem a more likely outcome than a rate cut in coming months.
Delivering the Opening Statement to the House of Representatives Standing Committee on Economics in Canberra, Ms Bullock sympathised with borrowers but made it clear swallowing bitter pills was sometimes the best medicine.
“I understand that this (lack of rate cut prospects) is not what many households want to hear.
“Those with mortgages are feeling the squeeze on their cash flows from the increase in interest rates over the past couple of years (and) businesses too are facing higher borrowing costs, but the alternative of higher inflation for longer is much worse.
“Inflation has not been this high for a few decades and I think many people have forgotten how bad it is – some younger people will not have experienced high inflation at all.
“There is a reason why there is so much talk about the cost of living – high inflation hurts everyone; it reduces what people can buy with their wages, erodes the value of savings, and it disproportionately hurts those on low or fixed incomes.
“This is why it is imperative we do what we need to do to ensure inflation returns to levels at which it is in the background again.”
2025 the likely year of the rate cut
Hotter-than-expected inflation data in June elevated expectations of an August RBA hike before July’s CPI figures deterred the rate hike bets.
The median forecast from economists surveyed by Bloomberg has predicted the RBA will lower the cash rate three times in 2025 to 3.6 per cent, with 0.25 percentage point rate cuts tipped for the first, second and third quarters of the calendar year.
For his part, the RBA’s Deputy Governor, Andrew Hauser, said in a speech to the Economic Society of Australia in Brisbane earlier this week that “false prophets” should not be claiming to know the future direction of markets and interest rates.
“Miss rates lie between 42 and 64 per cent,” he said.
“People are vastly too confident about what they truly know.
“Monetary policy works with long and variable lags, so our forecasts have to be medium term, not short term,” he said.
Despite the warnings around long-term predictions, interest rate relief in 2025 is still widely expected.
Bendigo Bank’s Chief Economist, David Robertson, is sticking with his long running forecast that Aussie borrowers will see some interest rate relief in 2025.
“Australians should expect the RBA to be in a position to cut rates next year, around six to nine months after other comparable central banks, such Canada, the US and New Zealand.
“The timing will be dependent on core inflation getting closer to 3 per cent, which we hope to see early next year.
“While conditions for households remain challenging due to persistent levels of inflation, real disposable income is forecast to improve next year.”
He added that Ms Bullock had “sensibly pushed back on the notion that the RBA could cut rates this year”.
The Commonwealth Bank is the only one of the big four banks to predict a rate cut in 2024. Westpac’s latest revision pushes the next expected cut to February 2025, with the current 4.35 per cent level sliding eventually to 3.35 per cent.
NAB has the RBA cutting rates in June 2025, while ANZ expects the first downwards movement to be in February.
Brian Martin, Head of G3 Economics, ANZ, said growth in Australia is forecast to pick up in the second half of 2024 and into 2025.
“Ongoing government consumption as well as business investment will support demand.
“ANZ Research expects the RBA to remain very focused on mitigating upside inflation risks, and anticipates only a modest 75-basis-point rate-cutting cycle in 2025.”
Repayments on a $1 million loan would decline by about $150 per month for each 0.25 percentage point interest rate cut.
