Rate cut around the corner? Not according to the IMF
Stressed out borrowers around the country are holding out for interest rate cuts but if the IMF's view of the Australian economy is anything to go by, they might be waiting longer than they'd prefer.
An interest rate cut is not in Australia’s best interests and the public need to get their head around that.
That’s effectively the message sent out by the International Monetary Fund (IMF), which on Thursday (3 October) backed the Reserve Bank of Australia’s tough stance on interest rates in the face of still-high inflation.
The IMF’s latest assessment report concluded interest rates were at a suitable level and hinted that they may even need to rise before they retreat.
“Macroprudential policies should maintain a stringent stance to mitigate the risk of excessive vulnerabilities in household balance sheets, particularly in the context of rising house prices.
“Should disinflation stall, monetary policy may need to be further tightened, supported by tighter fiscal policy while nurturing growth, and preserving targeted support to vulnerable households amid rising living costs,” the 2024 Article IV Mission statement noted.
It went on to add that the public needed to be on board with the RBA.
“While inflation expectations have remained anchored, the RBA should continue to build on its recent efforts and explore ways to further strengthen its communications capabilities and effectively guide the general public’s and the market’s understanding of its data dependent decision-making process and their expectations regarding policy shifts in an uncertain global policy environment.”
The RBA on 24 September maintained the official cash rate at 4.35 per cent.
Blow to Federal Government
While RBA Governor Michele Bullock will take comfort in the support of the 190-member-country IMF backing its policy stance, the Federal Government will be less enthused by the report’s findings.
Treasurer Jim Chalmers has insisted that increased spending – supposedly curtailed by higher interest rates – is not the factor preventing inflation from overcoming that last push towards the RBA’s preferred 2 to 3 per cent band.
While the US Fed and other nations have begun their round of rate cutting, Australia’s borrowers appear to have plenty more months ahead of them paying down debt at the current elevated level.
Mr Chalmers responded to the IMF report by stressing the government is trying to help rein in inflation while assisting households struggling with higher costs.
“The government’s primary focus is to get on top of our inflation challenge without ignoring the risks to growth,” he said in a statement.
“Our approach is all about easing the cost of living and fighting inflation at the same time as we lay the foundations for a stronger economy for the future.”
There was some upside for the Government in the IMF report, which endorsed back-to-back surpluses “achieved by saving revenue windfalls” from commodities while providing targeted relief to households.
IMF targets housing crisis
The IMF broadened its rates outlook to touch upon the “significant” housing supply crisis, and said a “holistic approach” was needed to put in place workable solutions.
The report noted that Australia faces a significant housing supply shortfall, exacerbated by structural challenges such as restrictive planning and zoning regulations, high land costs, infrastructure deficits, and residential dwelling investment around decade lows.
“These barriers, coupled with high interest rates, elevated building costs, and labour shortages, have led to a substantial backlog in housing development, contributing to escalating prices and affordability concerns.
“To address these issues, a comprehensive strategy is essential, focusing on increasing construction worker supply, relaxing zoning and planning restrictions, supporting the built-to-rent sector, expanding public and affordable housing, and re-evaluating property taxes (including tax concessions to property investors) and stamp duty to promote efficient land use,” it said.
“At the same time, capital flow management (CFM) measures that discriminate between residents and non-residents are not consistent with the Fund’s Institutional View and should be replaced by non-discriminatory measures.”
Australia’s big four banks are now tipping an interest rate cut by mid-February.
NAB is the latest big bank to adjust its cash rate forecast, bringing forward the timing of the first cash rate cut by three months, from May 2025 to February.
Three of the four big bank economic teams now expect the next move to the cash rate will be a 0.25 percentage point cut in February, with CBA sticking to a cut in December 2024.
The Australian Bureau of Statistics last week that showed underlying inflation — the RBA preferred measure — had fallen one percentage point in the past three months to now be at 3.4 per cent. Headline inflation now sits at 2.7 per cent.
Sally Tindall, Canstar Data Insights Director, said many banks were moving ahead with fixed rate cuts, which comes as little relief to the overwhelming majority of borrowers on variable rates.
“There was yet another downpour of fixed rate mortgage cuts this week with 12 brands cutting over 300 different rates across owner-occupier and investor loans including cuts from Adelaide Bank, Newcastle Permanent and the Teachers Mutual Group,” Ms Tindall said.
“As a result, 112 fixed rates are now lower than the lowest variable, however, the gap between the lowest fixed and variable rates remains just 0.26 percentage points.
But what the banks giveth, they taketh away.
Term deposit cuts continued to flood in over the past week, with 12 banks cutting 47 term deposit rates, while just three banks increased four rates.
“The deluge of term deposit cuts have come in lockstep with drops to fixed rate mortgages as banks start to price in the easing in the cost of wholesale funding and the likelihood of cash rate cuts within the fixed terms,” Ms Tindall said.
The IMF mission to Australia, which compiled the report, was led by Assistant Director in the Asia-Pacific Department of the IMF and Mission Chief for Australia, Lamin Leigh.