This article is from the Australian Property Journal archive
WITH inflation remaining high and spare capacity starting to open up in the economy, economists expect the Reserve Bank of Australia will keep rates on hold at 4.35% until early next year.
Australia will remain the outlier, as ANZ Bank chief economist Richard Yetsenga observed that the European Central Bank, Bank of Canada, Swiss National Bank and Riksbank (Sweden’s central bank) have all started easing rates
“We think the Bank of England will start easing in August, the US Fed will start easing in Q3 and the Reserve Bank of New Zealand in February 2025,” he said.
Yetsenga said the RBA will wait until early-2025 to cut rates because inflation remains stubbornly high, with the recent monthly inflation indicator rising to a five-month high of 3.6% in April.
“Getting an appropriate balance between the level of supply and demand is likely to take a little longer than expected due to less weakness in household consumption and strong government consumption supporting the economy. We continue to expect a shallow easing cycle of just 75bp, or three 25bp rate cuts,”
Capital Economics economist Abhijit Surya also believes the RBA will cut rates in 2025.
“Although underlying inflation remains uncomfortably high, it is unlikely to meet the threshold for a resumption of policy tightening. We suspect that the Bank will be content to wait for below-trend growth and labour market softness to dampen capacity pressures. That said, the path back to the RBA’s 2-3% inflation target is likely to be bumpy and we don’t expect rate cuts to come on the agenda before early next year.
“Even so, there are good reasons to suspect that the RBA won’t be rushing out the gate to resume its tightening cycle. For one thing, the monthly CPI indicator is notoriously volatile. Indeed, it has been overstating the quarterly measure of trimmed mean inflation – which the Bank puts more emphasis on – for the better part of the last year.
“For another, it’s evident that the Australian economy is worse for wear. We learnt last week that real GDP grew by a meagre 0.1% q/q in Q1. As a result, the annual growth rate slowed to 1.1%, its weakest result in 32 years apart from the pandemic. And more importantly from the RBA’s standpoint, real GDP growth appears on track to undershoot the Bank’s forecast of 1.2% y/y in Q2,”
Surya said although the RBA is unlikely to hike rates again, it will remain wary about prematurely loosening policy settings given the asymmetric costs of allowing inflation expectations to drift higher.
“Accordingly, we expect the Bank to start easing policy only in Q1 2025, although most forecasters believe that the RBA will pivot to rate cuts as soon as Q4 of this year. Furthermore, as the drag from past tightening starts to fade, and as the labour market remains strong by historical standards, we think there will be limited room for policy easing. Our forecast is for a terminal cash rate of 3.60% by end-2025, above the consensus forecast of 3.35%.
“For their part, markets are even more hawkish about the interest-rate outlook, as they are pricing in a terminal rate of almost 4% by end-2025. However, we think that’s a touch too far in the other direction. As internal staff analysis indicates, the RBA’s most recent estimates put the nominal neutral interest rate at around 3.50%. Market pricing would therefore imply policy remaining in contractionary territory long after inflation has returned to target, which seems like an unlikely scenario to us.” Surya said.
