2024 interest rate cuts in doubt as Australia lags other major economies

Like the famous meme of Homer Simpson retreating into a hedge, Australia’s major banks are backing away from predictions of multiple interest rate cuts in 2024.

On Tuesday (30 April), Australia’s biggest bank, CBA, revised its cash rate forecast, reducing the number of predicted Reserve Bank of Australia (RBA) cuts in 2024 from three 0.25 percentage point cuts, to just one, scheduled for November.

Last week, Westpac’s economic team also updated the bank’s cash rate forecast, reducing the number of predicted cuts from two to one.

The Big Four banks have reacted to the surprising uptick in the monthly inflation figure, from 3.4 per cent in February to 3.5 per cent in March.

Inflation remains high and above the RBA’s target 2-3 per cent band.

The quarterly CPI indicator in March was 1.0 per cent, up from 0.6 per cent in the December quarter. This movement is higher than each of the big four banks’ CPI forecasts for the March quarter, with NAB predicting the highest at 0.9 per cent.

The annual CPI in the 12 months to March was 3.6 per cent, slightly lower than 4.1 per cent annual rate in the December 2023 quarter. This marks the fifth consecutive quarter of lower annual inflation and is down from the peak of 7.8 per cent in the December 2022 quarter. 

Canstar’s Group Executive, Financial Services, Steve Mickenbecker, said the latest inflation data provides evidence the RBA will keep the cash rate on hold at 4.35 per cent during its May 6-7 Board meeting.

“The March quarter increase is a set-back after the promising 0.6 percent rise for the December quarter.

“It puts inflation well above the trajectory needed to return to the Reserve Bank’s target band of between two and three percent by the end of next year.

“Three months ago the 0.6 percent CPI increase implied a return to the mid-point of the Reserve Bank’s target in 2025.

“The one percent increase for the March quarter will leave the Reserve Bank concerned that we have fallen off the wagon.”

“The one percent CPI increase in the March quarter will not only delay rate cuts probably into 2025 at best but it also puts the potential for interest rate increases back onto the agenda.”

Looking overseas for interest rate guidance

The US economy is often seen as a leading indicator for the rest of the world, from impact to global economic growth and financial markets.

But the Fed is unlikely to be the first major central bank to start cutting interest rates in this cycle, just as it wasn’t the first major bank to hike rates after the pandemic.

Global investment management organisation, Franklin Templeton, noted that the RBA turned less hawkish at its 19 March meeting but maintained that it is “not ruling anything in or out,” which they view as not dropping its tightening bias altogether.

“We expect a move only in the fourth quarter once the impact of fiscal easing on growth is ascertained, and inflation and labour trends are more stabilised,” the Franklin Templeton Fixed Income Central Bank Watch report noted.

“A quicker loosening of the labour market could bring forward cuts, but that is not our baseline view.”

Europe appears likely to lead the way in reducing interest rates, with North America following soon after.

Inflation has declined the most in Canada and the Eurozone and is at a level where central banks will start considering cutting interest rates over the next few months.

The Franklin Templeton Fixed Income Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus two additional countries (China and South Korea).

The report said that although most developed market (DM) central banks remain in a holding pattern, the majority signalled a willingness to cut interest rates.

“Uncertainty remains regarding timing, but we expect the European Central Bank to cut as early as June, followed by the (US) Federal Reserve and the Bank of England, however, the stickiness of inflation and the resilience of growth will determine easing.”

The ‘stickiness’ of inflation is not just an Australian issue.

Diana Mousina, Deputy Chief Economist, AMP, said the US is the largest economy in the world, so trends in the US economy are often seen as a leading indicator for the rest of the world.

But she added that the Fed hasn’t necessarily led the interest rate cycle.

“Often, emerging market central banks are the first to either hike or cut interest rates (and by larger amounts) because of higher volatility related to their currencies and to deal with capital inflow.

“In the current cycle, most market commentators are talking about when interest rates will start to be reduced across the major developed economies, however, some emerging market central banks have already begun the process of loosening monetary policy.”

Ms Mousina said the Bank of Canada and the European Central Bank are likely to cut interest rates at their June meetings, ahead of the US Federal Reserve who are likely to delay the start of rate hikes until the second half of 2024 given the recent upside surprises to inflation.

“For Australia, we have been expecting the RBA to start cutting rates in June but the risk is a later start to cuts, like in August, as the RBA appears reluctant to cut interest rates before further confirmation of a slowing in inflation.”