Hoping for the RBA to cut interest rates? Here’s what the big four banks are saying

Only one of Australia’s four big banks expects a rate cut by the end of the year after the US Federal Reserve’s decision to cut its key interest rate by half a percentage point raised the question of the Reserve Bank of Australia doing the same at its next meeting.

The US Federal Reserve cut its lending rate to a range of 4.75 to 5 per cent on Thursday, joining central banks in Canada, England and New Zealand. The RBA meets early next week for its rates decision, keenly watched by mortgage holders given the bank has kept the cash rate at 4.35 per cent since November last year.

While RBA governor Michele Bullock has said a rate cut before Christmas “doesn’t align with the board’s current thinking”, markets are still expecting a rate cut before the end of the year.

However, following employment data and the Federal Reserve’s decision this week, markets have slightly trimmed their expectations, putting the chance of a 25 basis point cut by the end of the year at 80 per cent, down from 90 per cent.

What are the big four banks saying about a rate cut?

Westpac chief economist Luci Ellis said while the Federal Reserve’s rate cut was larger than expected, it would have no implications for the RBA’s decision.

CBA is the only big four bank to expect a rate cut this year.Credit:

“We continue to expect the RBA to hold rates next week and for the rest of the year,” she said. Westpac is not expecting a rate cut until February next year.

Commonwealth Bank head of Australian economics Gareth Aird said the recent strength in employment growth had pushed out the bank’s expectations for a rate cut from November to December.

While inflation for the third quarter of the year would likely fall below the RBA’s expectations, Aird said the latest labour market data was stronger than expected. The Australian economy added 48,000 jobs in August – well above expectations – and the unemployment rate held steady at 4.2 per cent.

However, Aird said he continued to expect a rate cut by the end of the year because data released since the RBA’s August board meeting had been softer or in line with its expectations.

NAB senior markets economist Taylor Nugent said the bank’s view had not changed this week, and that the first rate cut would likely be in May next year.

“We think the worst of the squeeze on households is behind us, and that it will take a while for the RBA to feel comfortable cutting rates,” he said.

Nugent also noted the RBA’s rates were not as restrictive as those in other major economies, and that it would likely be a “slow, gradual process” for interest rates to come down.

ANZ senior economist Catherine Birch said the US Federal Reserve’s 50 basis point cut on Thursday was unlikely to directly influence the RBA’s decision next week. Birch expected the Reserve Bank would consider a rise in rates before ultimately keeping the cash rate steady.

“We expect [the RBA] will retain much of the hawkish language of the August meeting and the communication since,” she said, adding that ANZ is not expecting a rate cut until February next year.

It doesn’t mean the banks aren’t preparing for a rate cut

Despite banks’ expectations that a rate cut is still at least a couple of months away, they have started trimming their interest rates as deposits have grown.

RateCity money editor Laine Gordon said 33 banks, including Westpac and ANZ, had cut at least one savings rate – the interest people can earn on their savings – this year. Household savings hit a record high of $1.5 trillion in July.

“The banks are getting smashed with ballooning deposit books,” Gordon said. “These cuts are designed to protect their profit margins. But it’s a grim outlook for Australians with savings in the bank, as they stare down the barrel of potential rate cuts next year.”

How will the US rate cut be felt in Australia?

Birch said the Federal Reserve’s rate cut could help push down goods inflation in Australia. Lower relative interest rates tend to grind down the value of a currency. The Australian dollar jumped relative to the US dollar following the Federal Reserve’s decision, meaning the cost of imports to Australia will fall.

However, data since the RBA’s last meeting, including GDP growth and unemployment, were broadly in line with the central bank’s expectations, and unlikely to have shifted its stance materially, Birch said.

In the political world, there is little expectation the US rate cut will lead to an immediate response by the RBA. Prime Minister Anthony Albanese and Treasurer Jim Chalmers on Thursday played down hopes the Reserve Bank would follow suit in the near term as the local sharemarket and dollar bounced higher on the Fed’s decision.

Both Chalmers and Albanese noted the RBA raised rates after other nations and did not go as high, and that Australia still had lower rate settings than the US, UK, Canada and New Zealand.

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