It was status quo at the Reserve Bank at the September meeting as the RBA kept interest rates on hold at 4.35 per cent, as RBA Governor Michele Bullock and her Board paid no attention to the proverbial noise from outside the Martin Place HQ calling for a rate cut in 2024.
Tongues are wagging, and forecasts are becoming more pointed as global central banks start making their moves, and some more encouraging inflation news emerges, albeit only in incremental monthly updates. Analysts are closely monitoring these developments, weighing their implications for domestic monetary policy. The interplay between international trends and local economic indicators continues to shape expectations among economists and market participants.
With no meetings scheduled until November, coinciding with Cup Day, the RBA has left itself time to assess economic conditions further. This extended pause, now into its 10th month, allows the bank to evaluate key indicators, including employment data and consumer spending patterns, before making any decisions.
As the landscape evolves, experts and commentators are left speculating about the potential paths forward. Some analysts believe that continued strength in the labour market could lead to a delayed easing cycle, while others anticipate that any significant signs of weakening inflation may prompt a quicker pivot.
We’ve analysed the commentary from the Reserve Bank, as well as experts and economists, to help paint a clearer picture as to what’s going on with interest rates in Australia.
There were a lot of changes to the statement that accompanied the 2.30 cash rate announcement, namely around data releases since August.
The RBA showed a little optimism at the start of the statement, however, they didn’t let that optimism linger.
“Headline inflation declined in July, as measured by the monthly CPI indicator,” the statement read. It removed the mention that “headline inflation is proving persistent”, instead saying it is “expected to fall further temporarily, as a result of federal and state cost of living relief.”
Cold water was then immediately poured on the positive sentiment in the next sentence, with the statement reading that the RBA’s current forecasts “do not see inflation returning sustainably to target until 2026.”
That’s much higher than the RBA’s initial timeline for inflation, where they had wanted it to fall into their two to three per cent band by mid-2025. They did update those forecasts to 2026, but now it seems they’re somewhat accepting the inflation decline will be slower than they’d hoped despite the rate hiking cycle.
At the press conference that follows the cash rate announcement, Bullock is always asked by journalists whether the bank had talked about any other decision than a hold. In recent months, the considerations have been around whether a hike in interest rates would be appropriate.
“We didn’t explicitly consider an interest rate rise at this meeting,” Bullock said in response to the opening question.
“The format of the meeting was slightly different. The way we framed the discussion was around what had changed since August, and what we would need to see to either raise interest rates or to lower interest rates, so there wasn’t an explicit alternative in the sense that I’ve talked about in the past.”
Governor Bullock acknowledged that headline inflation could print below three per cent, due to cost of living relief, when the August monthly CPI is printed the day after the RBA announcement.
“That’s going to lower our energy prices, and fuel prices have come down in recent months. It could well be the headline inflation rates come in below three per cent. That is important because it’s reflecting cost of living relief, so it is reflected in prices that people are seeing, but it’s not really reflective of the underlying inflation pulse.
Nine Finance Editor Chris Kohler asked about the rates coming down in the US, Canada, UK, Europe, New Zealand and China.
“Australia can set its interest rates to its own domestic circumstances,” Bullock said.
“Economic circumstances here are a little different than they are overseas. Canada and New Zealand are seeing quite sharp rises in their unemployment rate. The US [and some of the other countries], have seen inflation come down further than we are at the moment. Their disinflation process is further advanced than ours is. The other point I would make is that most of those countries had official interest rates at over five per cent. In our judgement, we look at how restrictive some of those countries are relative to us. We’re restrictive, but we think they’re more restrictive than us. They’re removing some of their restrictions because they’re seeing disinflation, and they’re seeing their labour market respond as well. We’re yet to see some of that, but we didn’t go as far as other countries.”
Inflation continues to trend downward, but not quickly enough for the Reserve Bank.
The July Monthly Consumer Price Index (CPI) indicator rose by 3.5 percent over the year, down from 3.8 percent in June, however importantly, slightly higher than market expectations. Monthly data can be less reliable than quarterly data and isn’t looked upon as important as the quarterly data releases.
The first month of each quarter also tends to focus more on goods and less on non-tradables and services—specifically, the domestic price pressures, such as household services, that the RBA is particularly concerned about.
The RBA noted that spending by "temporary residents, such as students and tourists," has contributed to inflation remaining above its target. In its August Statement of Monetary Policy (SoMP), the bank updated its inflation forecast, indicating that inflation is expected to return to the target range by late 2025 and approach the midpoint in 2026. Recently, however, they have revised this outlook, suggesting it may not enter the target range until 2026.
There was positive news one day after the rate announcement, with the August monthly CPI printing at 2.7 per cent, the lowest it's been since 2021. This was inline with market expectations.
While the primary reason for the rate hikes has been elevated inflation, several other factors are also at play. The Reserve Bank is keen to preserve the gains made in the labour market. A strong labour market generally signifies low unemployment and rising wages, which can boost consumer spending. Increased spending can raise inflationary pressures, as businesses may pass on higher labour costs to consumers, who are more willing to absorb those costs when employment is strong.
In July and August, the unemployment rate rose to 4.2 percent, the highest level since late 2021. However, this increase largely reflects record participation rates rather than a decline in employment strength. Notably, the number of employed individuals grew by 47,500, exceeding economists' expectations, while the number of unemployed people fell by 10,500 in seasonally adjusted terms.
“Labour market is still easing, but it remains relatively tight,” Bullock noted.
“We saw again last week solid growth in jobs. Based on the most recent data, employment continues to grow, and the rate of layoffs remains very low.
Every expert and economist in Finder.com.au’s RBA Cash Rate Survey predicted a hold at the September meeting.
Two-thirds of those surveyed expect to see the first rate cut in the first three meetings of the year, but only 44 per cent believe it will come in February, which will be the first meeting of the year. The next meetings will take place in April and May.
James Morley, Professor of Macroeconomics at the University of Sydney, says the RBA has made it clear that they are unlikely to cut rates until 2025 unless there is a material change to their forecasts of inflation and economic conditions. He however believes a cut could come sooner.
“I anticipate that more favourable progress on headline inflation for Q3 beyond the temporary effects of energy rebates and heightened worries about global economic conditions, especially related to China, but also with decreasing interest rates for many other countries, will motivate the RBA to start cutting in December of this year,” Morley said.
He added however that the RBA is not likely to cut more than three or four times unless conditions deteriorate much more rapidly than expected, such as a sudden spike in the unemployment rate.
“The limited number of cuts is because the RBA will be waiting to see the effects of these initial cuts to determine where the neutral level of interest rates is. Given likely ongoing weak productivity growth, I suspect neutral is a bit lower than the RBA might be currently expecting, so there could be a few further cuts later in 2025."
Commonwealth Bank is the only one of the Big Four banks predicting a rate cut in 2024, with expectations for the first cut to occur in December. They anticipate a total of five cuts in the easing cycle, bringing the official cash rate down to 3.1 percent.
NAB shares the view that 3.1 percent will be the lowest point in the easing cycle, but expects the first cut to take place in May. They have now also indicated a possibility of a cut as early as February.
Both Westpac and ANZ project that the first cut will happen in February, although ANZ suggests that a later timeline is also feasible. Westpac expects a total of four cuts, resulting in a rate of 3.35 percent, while ANZ is more cautious, predicting three cuts that would lower the rate to 3.6 percent as the conclusion of the RBA's easing cycle.
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