Interest Rate Update - July 2024
With interest rates now on hold since November 2023, things are starting to heat up. Economists had pencilled the start of the rate decrease cycle for late 2024, however recent commentary suggests things could go either way, with talk of a drop, a hike or a hold fairly easy to come across.
Internationally, we’ve seen the easing cycle start in major economies such as Europe, Canada and Switzerland, with the US projected to follow suit in the coming months.
In Australia, inflation - as the leading driver - has been a little more persistent and we’re considered to be a good few months behind global trends.
With our next rate announcement on August 6th, we have two major data releases prior on which much swings… Employment data on July 19th and quarterly inflation data on August 1st. The best case for rates to come down is to see inflation come down, and unemployment go up.
We also have four of eight RBA announcements yet to come in 2024, so the meetings are geared towards the back end of the year with a number of decision points remaining during this critical time.
Whilst the monthly inflation indicator for June was higher than expected at 4.1%, we need to keep in mind the monthly data is not near the quality of the quarterly data, and it’s the quarterly data that the RBA will rely on come August.
As is well documented, inflation is still being driven up by baby boomers… those with no mortgages and little impact from the peak of a rate cycle. Those that are feeling it are renters and mortgage holders, typically across younger generations.
Unemployment has been consistently low over recent years (outside of COVID), and while it will play a role in rates over the medium term, the RBA has been pronounced that inflation is the key metric.
What’s the likelihood of rates going up? Markets have priced in about a 40% likelihood of an increase, my gut feel is that this is a little high and all four of the Australian major banks do not expect a further increase, peaking at the current 4.35%.
What’s the likelihood of rates going down? They will go down, with time. When and how much is very much an ‘it depends’.
When will rates start going down? Whilst markets had initially priced in late 2024, it’s now more likely to be early 2025, with some hope the November 2024 RBA meeting brings some respite. The key data points mentioned above are key to this, so there’s a bit to play out over the coming month.
How quickly will rates go down? This is the golden question in my opinion, as a few minor drops might not have the material financial impact that many Australians so much desire. If we call a material change a 1% drop and average out the predictions of the majors, we’d hope to hit a cash rate of 3.35% by late 2025 or early 2026. So, don’t expect rates to drop in the fashion they rocketed up.
A few notes around what’s playing it’s hand economically;
GDP growth in Australia remains low, at around 1.1% in the year to March, and would be negative if it wasn’t for very strong population growth of around 2.5%
Tax cuts for FY24/25, plus energy rebates nationally may not be great for driving down inflation, however the impact is not expected to be overly material
Business investment is considered to be strong, however is skewed by large investment by the government sector
Real wage growth (wage growth less inflation) remains negative
In summary, we’re in a really critical point of ‘wait and see’, with the next month to be one of the most influential in terms of when we’ll see the easing cycle start.
