RBA casts doubt over 2024 interest rate cut prospects

The world’s advanced economies are moving towards an easing of a central bank interest rates but the Reserve Bank of Australia (RBA) has hinted that cuts might be slower to emerge here.

Minutes of the RBA board’s March meeting, released on Tuesday (2 April), would not rule in or out any official cash rate movements, either up or down, but did hint that cuts in 2024 may be off the table.

“Market participants continued to expect that many advanced economy central banks would begin reducing policy rates from around the middle of the year,” the Board noted, before watering down expectations that Australia would be leading any charge towards rate cuts.

“(Board) Members noted that fewer reductions in the policy rate were expected in Australia than in many other advanced economies.

“They observed that, in part, this was likely because the cash rate had not risen as high as policy rates in other economies, as the Board had chosen to return inflation to target gradually over time in order to preserve the gains in employment.

“Members further observed that market expectations were for policy rates to be at broadly similar levels by the end of 2025 across many advanced economies, including Australia.”

The suggestion Australia would have fallen in line with the likes of the US and UK by the end of 2025 contradicts forecasts from the Big Four banks and other economists that rates would likely be cut towards the end of 2024.

Members noted that most Australian households remained able to service their debts and meet essential expenses.

- RBA Board Minutes

Global financial risks also remained high, the RBA Board said, in justifying its most recent decision to keep rates at 4.35 per cent.

“Further weakness in the Chinese property sector could interact with longstanding macro-financial vulnerabilities. If stresses in the Chinese economy and financial system intensified or broadened, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion.

“Worse-than-expected macroeconomic outcomes – for example, arising from global inflation proving more persistent than expected or a geopolitical shock – could result in a disorderly adjustment in financial asset prices.

“Events in recent years had demonstrated the potential for this adjustment to be amplified by vulnerabilities in non-bank financial intermediaries in key global financial centres.

“Tight market spreads, if they persisted over an extended period, could contribute to a build-up of leverage and future risks to financial stability.”

Domestic considerations also pointed to the RBA keeping rates steady for a while yet.

The RBA noted real household disposable income had started growing again — thanks to dissipating inflation and wages growth — and would pick up further this year once Stage 3 tax cuts take affect and disinflation continues.

“Strong conditions in the labour market and the large savings buffers accumulated during the pandemic were helping households adapt to challenging economic conditions and restrictive monetary policy,” the minutes stated.

The RBA minutes show the board considered implications for the cash rate if productivity did not pick up as assumed, and any economic adjustment associated “may not be smooth or immediate”.

The immediate response of the Australian dollar following the release of the minutes was to stay flat, suggesting the market saw no imminent change to the RBA’s interest rate policy.

If borrowers were to glean any optimism from the latest RBA meeting it is that, for the first time since it began its aggressive run of rate hikes, the Board did not consider the option of a rate rise.

“Members observed that inflation had continued to moderate over prior months, broadly as expected,” the minutes noted, before again watering down rate cut expectations.

“That said, services inflation remained high and the recent slowing in the pace of monthly inflation had been influenced by several temporary factors.”

The RBA forecasts inflation, currently 3.4 per cent on its most recent measure, will not fall within its 2 to 3 per cent target band until December 2025.

Bringing inflation back to target “remained the board’s highest priority”, but the board admitted it would “take some time before they could have sufficient confidence that this would occur within a reasonable timeframe”.

Stressed borrowers not an RBA concern

The still-high interest rate environment was not perceived as a major burden on borrowers by the nine members at the meeting or the ten other economic experts present.

“Members noted that most Australian households remained able to service their debts and meet essential expenses, and this was expected to remain true even if inflation were to prove more persistent than anticipated.

“Strong conditions in the labour market and the large savings buffers accumulated during the pandemic were helping households adapt to challenging economic conditions and restrictive monetary policy.

“Many borrowers, including those on lower incomes, had also increased the savings they held in offset and redraw facilities over the preceding year; some were likely to have reduced consumption in order to facilitate this.”

There was, however, some qualified empathy.

“Members recognised that a small group of borrowers, typically those with modest savings or income buffers, remained under acute financial pressure owing to the effects of high inflation and higher interest rates.”

If interest rates are a source of financial stress, as they were for 26 per cent of respondents to API Magazine’s latest quarterly Property Sentiment Report, relief may still be some way off.