Commonwealth Bank says the RBA will cut interest rates in 2024 as inflation threat cools

Australia’s biggest bank says the RBA will start to slash interest rates next year as inflation bottoms out.

Australia’s biggest banking group says the chances are high that the Reserve Bank will successfully engineer a soft-landing of the economy in 2024 as higher interest rates have the desired effect of slowing the economy without creating a recession.

Commonwealth Bank expects that scenario in cooling of the Australian economy along with a faster fall to inflation will see the RBA cut the official cash rate by nearly 1 percentage point in the back half of 2024 in a major win for households.

The bank’s chief economist Stephen Halmarick said that 75 basis points worth of rate cuts will start from likely September — which would see interest rates from 4.35 per cent to 3.60 per cent.

This was then to be followed up another 75bps in 2025 as inflation comes back into the RBA’s 2-3 per cent target range slightly earlier than expected. In total this could bring the cash rate down to 2.85 per cent.

“Markets have shifted to our view that the global monetary policy tightening cycle is at an end, and that 2024 will see interest rate cuts from some of the major central banks, especially the US Federal Reserve and the RBA,” Mr Halmarick said.

“CBA is forecasting the annual rate of inflation back at 3 per cent at the end of 2024, well ahead of the RBA’s current forecast and closer to the Commonwealth government’s latest forecast.”

Most economists in recent weeks have increased the likelihood of rate cuts next year as markets take their cues from the US and chatter its central bank could start cutting from as soon as March.

Australia’s mortgage belt have been hit by a record run of rate rises with repayments on a $500,000 loan up by $1210 per month since hikes began in May 2022. Repayments on a $750,000 were up $1815 and $2420 on a $1m loan, according to RateCity.com.au.

Commonwealth Bank’s Stephen Halmarick says the RBA will cut interest rates in 2024. Hollie Adams/The Australian

Mr Halmarick said while the Australian economy is losing momentum, led by a slowdown in household spending, inflation was also decelerating — albeit at a slower pace than other nations.

“The good news is that the pace of global inflation clearly begun decelerating around mid-2023 and we expect further deceleration in 2024, however markets will also focus on the balance between returning inflation to 2 per cent targets, without doing too much damage to labour markets,” he said.

The RBA’s Statement on Monetary Policy in November said noted inflation would fall to 4 per cent by June and 3.5 per cent by the end of next year, before hitting the top end of its 2-3 per cent in December 2025.

Commonwealth Bank also expected that employment growth will remain positive in 2024, but unemployment will climb up to 4.5 per cent by the end of 2024.

“Importantly, no one needs to lose their job for the unemployment rate to rise, all that is required is for job growth to be slower than the increase in the working age population,” Mr Halmarick said.

“Looking ahead, 2024 will have more than its fair share of risks and challenges, particularly geopolitical risks as well as the United States presidential election. Despite these obstacles, the Australian economy remains in relatively good shape.”

Minutes from the RBA’s December meeting that the board is concerned Australia could see a sharper rise in unemployment than anticipated which played a key role in its rationale for leaving rates on hold.

The bank also saw that migration would retreat from record highs this year, along with a “consistent and co-ordinated measures to increase the supply of new dwellings”. Dwelling prices are forecast to rise by a further 5 per cent in 2024, following 9.6 per cent growth since the trough in February 2023.