Economists, bond markets reveal predictions ahead of September meeting on interest rates

Australia’s bond markets are betting on a zero per cent chance of interest rates rising in good news for struggling homeowners.

Australia’s bond markets are betting on a zero per cent chance of interest rates rising this week in great news for homeowners around the country, although they think future hikes are still very possible.

Experts are all but certain that interest rates will remain on hold for another month, which will spare mortgage holders from financial pain after months of back-back hikes.

The RBA has increased interest rates every month since May last year, with the exception of April, July and August, when rates were momentarily paused.

Still, as it stands, Australians are in the throes of the nation’s highest cash rate since 2011, enduring 400 basis point increases over the space of a year. The cash rate has jumped significantly from the historic pandemic low of 0.1 per cent to its current rate of 4.1 per cent.

Economists’ latest predictions of a rates pause come amid signs that inflation has dropped past its peak, and also with key economic information being released the day after the Reserve Bank of the Australia (RBA) is due to pass on its decision.

On Tuesday, the RBA is holding its September meeting, and it also marks the last meeting where outgoing governor Philip Lowe will hold the bank’s top job.

However, the following day, the Australian Bureau of Statistics will release data about the nation’s gross domestic product for the second quarter, and it’s expected to show that Australia’s economy is crawling at a sluggish pace.

Shane Oliver, chief economist at AMP, is one of the experts who thinks another pause is all but inevitable come Tuesday. However, he says Australians should still prepare for the worst for future months.

“The bad news is that inflation is still too high and several key areas are still seeing very strong and accelerating inflation – notably rents, electricity and insurance costs — and higher petrol prices may boost inflation again in August,” he said in a note.

This is Philip Lowe’s last month as RBA Governor. Picture: NCA NewsWire / Martin Ollman

But in some good news, Mr Oliver believes the RBA’s rapid tightening cycle will make everything go back to normal by June 2024, effectively ending the cost of living crisis.

“There is a good chance that inflation will be at three per cent by mid next year, 12 months ahead of RBA expectations,” he said.

Inflation has fallen drastically in a sign that the cash rate might not go up any more.

“Australian inflation fell more than expected in July adding to the likelihood that the RBA’s cash rate has peaked,” Mr Oliver explained.

For instance, he pointed out that in December last year, inflation sat at 8.4 per cent. Now it’s gone down to 4.9 per cent.

Homeowners have been hit with back-to-back interest rate rises. Picture: NCA NewsWire / Gaye Gerard

“It can also be seen … that Australian inflation is continuing to follow US inflation down with a lag of about six months, just like we lagged on the way up,” Mr Oliver added.

This, too, is promising.

The US is also expected to pause its interest rates for the month of September after new data pointed to a flagging economy, with a softening jobs market and a rising unemployment rate, which hit 3.8 per cent according to the latest data released on Friday.

Originally published as Economists, bond markets reveal predictions ahead of September meeting on interest rates