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Stubborn inflation means rate cuts might not arrive in 2024

Australians hoping for an interest rate cut this year may be setting themselves up for disappointment, with persistent inflation and strong jobs data meaning the cash rate could be on hold for the rest of 2024.

Bendigo Bank Chief Economist, David Robertson, said the official cash rate, which is currently at 4.35 per cent, is here to stay until 2025.

“While the RBA kept rates on hold again in May as expected, markets have been rethinking their timeline for when the easing cycle might start and had even started to partially price in another hike,” Mr Robertson said.

“Our view for over a year has been that RBA rate cuts will start in 2025 to help support the slowing economy, but not in 2024 because of how difficult it is to eradicate inflation.

“With the market now coming to the same conclusion, the first cut is now predicted for early to mid-2025.”

Mr Robertson said that while the possibility of another hike was always there, and similarly the US were also taking longer to start its easing cycle, Bendigo Bank still favour no move up or down from the RBA this year.

“More strong jobs data, with our unemployment rate still in the high threes and stubborn core inflation encouraged a few market economists to predict fresh RBA hikes, but much weaker retail sales numbers were a reminder households are doing it tough, and are cutting back on discretionary spending,” he said.

Across the big four banks, the consensus remains that we have reached the peak in the cash rate.

ANZ predicts that the first cuts will start around November 2024, with rates dropping to 3.60 per cent by mid-2025.

CommBank predicts that the current level of 4.35 per cent will be the cash rate’s peak and that the first cut is likely to occur around September, with rates eventually dropping to around 2.85 per cent by the middle of 2025.

NAB economists believe that the first cuts will happen in the December quarter of 2024, with rates falling to 3.10 per cent by the end of 2025.

Westpac also predicts that the current level of 4.35 per cent will be the peak and that we might expect the first rate cuts to occur around September, with the cash rate eventually settling at 3.10 per cent in the September quarter of 2025.

However, not all banks are on the same page.

Recently Warren Hogan, the chief economic advisor of Judo Bank, suggested that the RBA would be forced to hike the cash rate by up to three times in 2024 starting in August, September and November, bringing the cash rate to 5.10 per cent.

He said with rates above 5 per cent in the US, New Zealand, Canada and the UK, it’s only a matter of time before the RBA hikes again, given that the current strategy of holding “doesn’t seem to be working” with inflation remaining high.

Mr Robertson said the turning point between tightening and easing cycles was always the toughest to forecast, for economists and for central banks alike.

“The timing of the first cut is at the mercy of the data, and economic data in this period is generally all over the shop, but we’re still expecting very slow economic growth and domestic demand ahead, with the main bright spots coming from international tourists and students, and strong public investment,” he said.

“Headline CPI fell to 3.6 per cent in the latest numbers for the first quarter, but the core read was 0.2 per cent higher than hoped at 4 per cent, with rents and services inflation remaining the problem.

“Goods inflation continues to moderate, although it may be challenged by higher energy prices and geopolitical strains in the coming months.

“The latest RBA Statement on Monetary Policy now forecasts core inflation to still be well above target at year-end.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.