The Reserve Bank has given a strong hint borrowers are getting some interest rate cuts soon even though inflation is still too high.
The minutes of the RBA’s December meeting, released on Tuesday, have suggested the next move was now likely be relief should inflation fall towards its two to three per cent target at a faster pace.
‘If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness,’ it said.
This is a big change from November when Reserve Bank Governor Michele Bullock hinted a rate rise was still possible.
‘We’re watching the data closely and we’re not ruling anything in or out,’ she said then.
‘So, the reason I say we’re not ruling anything in or out is we do think that there are still some risks on the upside.’
The Reserve Bank’s December meeting minutes, however, still expressed concern about high inflation, despite for the first time indicating the next move was likely to be a cut.
‘In weighing up the potential implications of these observations for future decisions on the stance of monetary policy, members reiterated their earlier view that they had minimal tolerance to accommodate a more prolonged period of high inflation than currently envisaged,’ it said.
The Reserve Bank has given a strong hint interest rate cuts are coming even though inflation is still too high (pictured are Sydney shoppers)
While headline inflation is at a three-year low of 2.8 per cent, the RBA regarded this as a product of temporary $300 electricity rebates from the federal government and cheaper petrol prices.
Underlying inflation without one-off factors, known as the trimmed mean, was higher at 3.5 per cent in the year to September, putting it at a level above the Reserve Bank’s 2 to 3 per cent target.
The minutes, however, suggested the Reserve Bank was now less worried about wages growth keeping inflation higher for longer.
‘They noted that it was possible for wages growth to slow even when employment was above its full employment level, so long as the labour market was moving towards better balance and inflation expectations remained anchored,’ it said.
Australia’s unemployment rate fell to 3.9 per cent in November, which is well below the 5 per cent level traditionally associated with higher inflation – known as the non-accelerating inflationary rate of unemployment.
This occurred as wages growth slowed from 4.3 per cent at the end of 2023 to 3.5 per cent in September.
The RBA noted other nations – including the U.S. and the United Kingdom – have been cutting rates this year while they haven’t.
But the minutes suggested rate cuts would be unlikely to be as deep overseas, after the US Federal Reserve last week panicked financial markets by hinting fewer rate cuts were likely in 2025 than anticipated.
This is a big change from November when Reserve Bank Governor Michele Bullock hinted a rate rise was still possible
‘Despite the reductions abroad, the combination of market pricing and central banks’ estimates of neutral interest rates implied that monetary policy might be more contractionary in several economies than in Australia and remain so into 2025,’ the minutes said.
The Reserve Bank of Australia cash rate of 4.35 per cent is now 110 basis points higher than Canada’s equivalent policy rate of 3.25 per cent, following four rate cuts in 2024.
New Zealand also has a lower cash rate of 4.25 per cent following three rate cuts this year that have failed to stop a recession.
In Australia’s case, the RBA’s 13 rate rises in 2022 and 2023 haven’t yet caused a technical recession but the economic growth pace of just 0.8 per cent in the year to September was the weakest since the 1991 recession.
Nonetheless, Australia’s 4.35 per cent cash rate is still marginally lower than the US Fed’s equivalent level of 4.25 per cent to 4.5 per cent level and the Bank of England’s 4.75 per cent rate.
The futures market sees three RBA rate cuts in 2025 that would take it back to 3.6 per cent for the first time since May 2023.
Westpac, ANZ and NAB are not expecting any relief until May while the Commonwealth Bank is forecasting a February interest rate cut when the RBA’s new monetary policy board meets after the summer break.
