Australian mortgage holders may need to wait until 2025 for relief from the Reserve Bank.
Despite slightly more positive inflation data in Q2 2024 compared to Q1, RBA Governor Michele Bullock has effectively ruled out a rate cut this year.
“A near-term reduction in the cash rate doesn’t align with the Board’s current thinking,” Bullock said at the press conference following the Reserve Bank’s decision to maintain the cash rate at 4.35 percent for the seventh consecutive meeting.
The Statement of Monetary Policy, released four times a year (in February, May, August, and November), provides a deeper insight into the RBA’s perspective. This latest statement offers intriguing details that we will explore, along with views from the RBA, the Big Four banks, and various experts and economists.
The RBA’s latest Statement, which accompanies each rate decision, introduced several noteworthy changes.
The statement began by highlighting the key issue: inflation. It noted that the Consumer Price Index (CPI) rose by 3.9 percent over the year to the June quarter. A new addition to the statement was the observation that “inflation is proving persistent.”
“In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters. Additionally, quarterly underlying CPI inflation has changed very little over the past year. The economic outlook remains uncertain, and recent data show that the process of bringing inflation back to the target has been slow and uneven.”
A significant new addition appeared toward the end of the statement, released an hour before Governor Bullock’s announcement that rates would not be reduced this year.
“Policy will need to remain sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range,” the statement concluded, following the revised expectation for when inflation will return to the target band of two to three percent.”
Since the beginning of 2024, RBA Governor Michele Bullock has been holding press conferences following the RBA rate announcements to provide deeper insights into the Bank's decision-making process.
The conference typically starts with Bullock's opening remarks, followed by a Q&A session where journalists delve into the behind-the-scenes discussions leading up to the rate decision.
Bullock’s remarks set the stage for the questions that follow.
“Based on what we know today, a near-term reduction in the cash rate does not align with the Board’s current thinking,” Bullock stated.
“We’ve observed how volatile inflation can be as it declines. The economy needs better balance between demand and supply. I understand this isn't what people want to hear. Many households and small businesses are struggling with current interest rates, and the Board is very aware of this. However, the best approach is to bring inflation back to target. Allowing inflation to drift would harm everyone, particularly those with lower incomes. Therefore, we must remain committed to reducing inflation until it consistently falls within the 2 to 3 percent range.”
Bullock mentioned that, for now, the Board believes the current cash rate is suitable for balancing inflation and employment objectives, though some uncertainty remains about the economic outlook.
There is still a risk that inflation could take longer than expected to return to target.
Although recent CPI data were broadly in line with the RBA’s expectations and forecasts, inflation remains too high, and the Board is concerned about excessive demand in the economy.
Bullock noted that the options being considered were either maintaining the current rate or increasing it, with no consideration given to a rate cut.
“We are setting policy for future conditions, not past ones, and this is challenging. We’re emerging from an extraordinary period marked by massive supply shocks, a near-zero cash rate in 2022, and significant fiscal support during the pandemic. It’s not surprising that it’s taking time for things to stabilise.”
The Statement of Monetary Policy highlighted two key areas: inflation and spending.
First, the Board revised its forecast for demand growth. The RBA now expects public final demand—encompassing total domestic consumption and public sector investment—to increase by 4.1 percent through the year ending June 2025, up from the 2.1 percent projected in the May Statement of Monetary Policy (SoMP).
At the press conference, Bullock explained that the upward revision was driven by “stronger forecasts for public spending and an anticipated increase in household consumption.”
However, she also noted that household consumption might grow more slowly than expected if households, facing uncertainty, decide to save a greater portion of their income than currently anticipated.
The SoMP also projected that inflation would return to the target range of 2 to 3 percent by late 2025 and approach the midpoint of this range in 2026.
“This represents a slightly slower return to target than forecast in May, primarily because the gap between aggregate demand and supply in the economy is larger than previously estimated. This adjustment partly reflects the increased forecast for domestic demand but also acknowledges that the economy’s capacity to meet this demand is somewhat weaker than initially thought, as evidenced by persistent inflation and continued strength in the labor market,” the SoMP stated.
The end of July brought more positive news compared to three months earlier. The Consumer Price Index (CPI) rose by 1 percent to 3.8 percent annually, aligning with forecasts from both the RBA and banks.
This represents an increase from the 3.6 percent CPI reported for the March quarter. The March quarter CPI was problematic because it exceeded the 3.5 percent forecast, leading to speculation about potential further rate hikes.
While inflation remains high at 3.8 percent, RBA Governor Michele Bullock indicated that the RBA is "cautiously forecasting" it will reach the top of the 2 to 3 percent target range by the end of 2024.
Attention will shift back to the monthly inflation data, though it carries less weight compared to quarterly data. Monthly figures cover about two-thirds of the CPI basket, including goods and services such as most food items, alcohol, tobacco, fuel, and holiday travel. However, it does not include services such as rents and energy bills.
The next quarterly CPI release for Q3 2024, which will include comprehensive data on both goods and services, is scheduled for October 30—just two weeks before the RBA's November cash rate decision. Notably, the October 2023 release influenced the RBA to raise rates on Cup Day.
Until just before the June RBA meeting, the Big Four banks had all anticipated that November 2024 would mark the start of the rate cut cycle. However, ANZ has revised its forecast, now expecting the first rate cut to occur in February 2025.
ANZ has maintained this outlook despite recent inflation data and the RBA's decision to hold rates at its August meeting. The bank predicts that by the end of 2025, the cash rate will be reduced to 3.6 percent, implying three rate cuts throughout 2025.
“Given the tone of today’s statement, a rate cut this year would likely require a much more rapid deterioration in economic activity than we expect,” said Adam Boynton, ANZ’s Head of Australian Economics.
Just before the July inflation data release, NAB also updated its forecast, pushing the anticipated first rate cut to May 2025. NAB still expects the RBA to eventually lower rates by 125 basis points (or 1.25 percent), bringing the official cash rate down to 3.1 percent.
“We acknowledge the near-term risks of higher rates but believe the RBA will maintain its strategy to preserve labour market gains, necessitating a longer period of holding rates steady,” noted NAB’s Forward View Australia.
Westpac, the latest of the Big Four to adjust its expectations, has also revised its view on the timing of rate cuts based on recent communications from Bullock and the Board.
“Given that the Board does not foresee cutting rates this year, our previous expectation of a November rate cut is now unlikely to materialise,” said Luci Ellis, Westpac’s Chief Economist and former RBA staffer.
“The Board’s statement and the Statement on Monetary Policy highlighted persistent inflation risks and did not rule out any potential outcomes. The forecasts were more hawkish than anticipated, reflecting a surprisingly optimistic view on domestic demand.”
Westpac is currently reassessing its rate forecasts in light of the RBA’s economic outlook. Prior to these recent communications, Westpac had been confident in its forecast.
“Inflation seemed to leave room for a potential rate cut,” said Justin Smirk, Westpac’s Senior Economist.
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