When Will Interest Rate Go Down in Australia in 2024?
"It took only three quarters to fall from 8% to 5.5% as the supply side issues eased and there's still a bit more to go there, but we expect it's going to take another two yeas for inflation to fall that much again and move below 3%." Governor Bullock said.
Latest News about Australian Monetary Policy Decision
At its meeting on 7 November 2023, the Board decided to raise the cash rate target by 25 basis points to 4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.25 per cent.
Amidst a global surge in inflation, Australia has seen a series of interest rate hikes since April 2022, a strategic move by the Reserve Bank of Australia (RBA) to counteract these inflationary pressures. These increases, a departure from the record-low rates we've grown accustomed to, have rippled through the economy, affecting everything from mortgage repayments to business loans.
It’s a complex scenario, and pinpointing when this upward trend might reverse is no straightforward task. However, the RBA's decisions are not made in a vacuum; they're carefully calibrated responses to a range of economic indicators and global trends. In this piece, we delve into the key factors the central bank monitors, providing a clearer lens through which to view future policy shifts, even if the exact timing of a rate decrease remains an open question.
Latest Fed Meeting (FOMC) in US
Federal Reserve Governor Bowman: The risk of rising inflation still exists, and the time has not come to cut interest rates
Federal Reserve Governor Michelle Bauman has been one of the staunchest supporters of monetary austerity policies. She said on Monday that she had adjusted her position slightly and hinted that interest rate hikes might be over. However, Bauman said that she is not ready to start cutting interest rates. Speaking at an event, Bauman pointed out that the Federal Reserve has made progress in fighting inflation and said that short-term interest rates should continue to be at current levels.
Federal Reserve Bostic: It is expected to cut interest rates twice this year. The first rate cut will be in the third quarter
On Monday local time, 2024 FOMC voting committee and Atlanta Federal Reserve Chairman Bostic said that the decline in inflation has exceeded his expectations and is moving smoothly towards the Fed's 2% target, but it is still too early to announce victory. Bostic reiterated his expectation that interest rates would be cut twice this year and told reporters after the meeting that he expected the first rate cut to be in the third quarter of this year.
Latest News about US Treasury Rally - global asset pricing anchor
According to Praveen Korapaty, Goldman Sachs's chief interest-rate strategist, and Joseph Brusuelas, the top economist at tax consulting firm RSM, the 10-year Treasury yield is expected to increase to approximately 4.5% by the end of next year, indicating a potential upward trend for the "global asset pricing anchor" instead of the previously predicted decline due to optimistic interest rate cut expectations.。
However, a Reuters poll of 50 bond strategists, mostly from sell-side firms, said that the 10-year yield will then fall to 4.10% by end-May, before hitting 3.88% in 12 months.
At the beginning of November, markets were pricing about 70 bps worth of rate cuts for next year and now it's 120. Much of the declines we saw recently were based on the front-loading of these expectations," said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
Bond giant Pacific Investment Management Co. is renewing the call for 2024 as well. Pimco managers predict that 2024 will be an excellent time for the bond asset class.
The Current Inflation Outlook
Australia's current economic landscape, particularly in terms of inflation and monetary policy, is navigating through a phase of transformation. Since November, the Reserve Bank of Australia (RBA) has increased interest rates by 25 basis points, marking a strategic shift from the previous period of steadiness. This decision reflects the RBA's response to the unexpectedly resilient economic activity and inflation rates. Although inflation is gradually declining, it's projected to return to the target rate more slowly than initially anticipated.
The Current Inflation Factors
According to Michele Bullock, chair of the Reserve Bank Board of Australia, a key aspect of this inflationary phase is its domestic and demand-driven nature, contrasting with the earlier supply-side disruptions caused by global events and supply chain challenges during the pandemic. The broad-based nature of inflation, extending beyond just fuel, electricity, and rents to a wide array of goods and services, underscores the depth of these demand-driven pressures.
The RBA's analysis indicates that strong domestic demand is a significant factor driving inflation, especially evident in the service sector, where costs are rising sharply. This situation is further compounded by increased labor and non-labor costs, signaling persistent domestic cost pressures. The high rates of labor utilization point to limited spare capacity in the economy, suggesting that demand continues to exceed supply.
Interest Rate Forecast by Banks Institutions
Diverse forecasts from top financial institutions provide key insights into the RBA's potential interest rate decisions.
OECD (Organization for Economic Co-operation and Development) assumes that the cash rate will be held at this restrictive level until inflation is clearly declining to the target band, with 75 basis points of interest rate cuts assumed between the third quarter of 2024 and end-2025.
National Australia Bank foresees the RBA cash rate peaking at 4.60% by March-2024, maintaining this level until the first cut happens by the fourth quarter, eventually leading to a rate of 3.10% by March 2026.
Westpac anticipates a deceleration in inflation and the labour market in Q4 and beyond, and so continues to expect the cash rate will remain at its current level until Q3 2024, when the next rate cutting cycle begins.
RBA's Inflation Projection in Long Term
Bringing inflation back to its target, therefore, is not just a matter of adjusting interest rates; it requires a careful balancing act to align aggregate demand with supply. The RBA anticipates this process to extend over the next two years, underscoring the complexity of moderating inflation while supporting employment growth.
"It took only three quarters to fall from 8% to 5.5% as the supply side issues eased and there's still a bit more to go there, but we expect it's going to take another two yeas for inflation to fall that much again and move below 3%." Governor Bullock said in her speech during the Australian Business Economists annual dinner.
In conclusion, the RBA will continue to closely monitor economic indicators, particularly inflation and labor market conditions, and adjust interest rates accordingly. Given the current context of inflation being more domestically driven and demand-based, the RBA may consider further interest rate adjustments to ensure that inflation returns to its target range.
Reference:
Michele Bullock. (2023, November 22). Speech. A Monetary Policy Fit for the Future. Reserve Bank of Australia.
https://www.rba.gov.au/speeches/2023/sp-gov-2023-11-22.html
OECD Economic Outlook. Volume 2023 Issue 2: Preliminary Version
https://issuu.com/oecd.publishing/docs/australia-oecd-economic-outlook-november-2023?fr=xKAE9_zU1NQ
Interest Rate Forecasts, Australia Policy Rates, National Australia Bank.
https://www.nab.com.au/business/international-and-foreign-exchange/financial-markets/interest-rate-forecast
Australia & New Zealand Weekly. WestpacWeekly.
https://www.westpac.com.au/docs/pdf/aw/economics-research/WestpacWeekly.pdf