Rates to remain on hold till mid-2025, BDO predicts
The Reserve Bank will wait to see what the government’s plans are for fiscal policy and the pipeline of nation-building projects, according to BDO.
As widely expected, the Reserve Bank of Australia decided to leave the cash rate target unchanged at 4.35 per cent in its decision handed down on Tuesday.
BDO Economics partner Anders Magnusson said the RBA chose not to deliver an early Christmas present, “showing appropriate caution”.
Magnusson said he does not expect a rate cut until at least mid-year, even though it has been stable for over a year and inflation is heading back to the 2 to 3 per cent target range.
"The reason is simple: the RBA needs to be comfortable with the government’s plans, including fiscal policy and the pipeline of nation-building projects," he said.
"Meanwhile, the Australian economy is growing exceptionally slow, supported by public spending and migration, and GDP per capita continues to decline indicating a loss of standard of living for many Australians."
Magnusson said while many Australians are doing it rough this festive season, to uphold Australia's standard of living as a nation in the future, Australia needs real productivity improvement now.
"Any relief from a rate cut would be short-lived without it," he said.
"The Productivity Commission has taken action to figure out how to solve the productivity puzzle through “Australia’s Productivity Pitch”. Productivity should be the focus of our government as well."
AMP chief economist Shane Oliver said while AMP also expects the first rate cut to be in May, weakening GDP growth could see the RBA downgrade its growth expectations, reducing its concerns about excess economic demand.
“Taken together with output price pressures in various business surveys this indicates the RBA should be considering a rate cut sooner rather than later,” Oliver said.
“While we moved our base case for the first cut out to May on the grounds that the RBA appears to be in no hurry to cut rates, a good December quarter trimmed mean inflation reading could push it over the line to cut in February given the softness we have seen in GDP.”
A February cut is even more likely if upcoming jobs data softens, he added, and money market expectations have also become less hawkish, with the market predicting a 55 per cent chance of a cut in February and a cut fully priced in for April.
“A week ago, that wasn’t the case until May,” he said.
Dale Gillham from Wealth Within said while the RBA has likely kept the rate high for Christmas to curb spending, the easing of rates is now overdue.
“Once the festive season is over and everyone has their credit card statements, I think rates will start to drop,” Gillham said.
University of Sydney economist Stella Huangfu said a rate cut may be further away with core inflation still above the RBA’s target of 2 to 3 per cent.
“RBA Governor Michele Bullock has stated that inflation is still too high for rate cuts anytime soon and that interest rates will stay high until inflation consistently falls within the target range,” Huangfu said.
Craig Emerson from Emerson Economics said by April 2025, the headline inflation rate will have been within the 2 to 3 per cent target range for more than half a year, real per capita GDP will have been negative for an inordinately long time and the RBA will run out of reasons to maintain the current cash rate.
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