Why the jury is out on RBA interest-rate cuts despite its hawkish pivot
Borrowers hoping for mortgage relief face an anxious wait as the Reserve Bank warns stronger economic data could keep interest rates higher for longer.
The Reserve Bank’s message last week was clear – don’t count on further rate cuts.
The change in tone was striking. The fall in underlying inflation had “slowed” and recent data suggested inflation “may be higher than expected”.
Stronger than expected economic growth and inflation data “may indicate that households have become more comfortable consuming as real incomes and wealth rise”.
It sounds positive but stronger economic growth at a time when unemployment and productivity rates are low, and core inflation shows signs of annualising near the top end of the target band, may be worrisome for policy makers.
“If this continues, it may make it easier for businesses to pass on cost increases and lead to more demand for labour,” the bank warned.
That’s central bank speak for a classic inflationary spiral.
If businesses come to sense that interest rates will effectively underwrite consumer demand, then they will be inclined to raise their selling prices and wages, pushing inflation higher.
The warning from the RBA was a significant shift that dampened expectations of interest rate cuts.
As of last week, three of the four major banks had thrown in the towel on further rate cuts this year.
NAB, Citi and Deutsche Bank gave up on 2025 cuts after the monthly CPI data two weeks ago, predicting that the RBA won’t cut again until May 2026, if at all.
CBA, ANZ and JPMorgan followed suit after the RBA statement last week.
CBA and ANZ see the next cut coming in February.
Only Westpac remained optimistic, still predicting three more cuts in November, February and May. But even Westpac’s chief economist Luci Ellis now admits a November cut is “far from assured”.
Market pricing as of last week had a November rate cut priced as a 40 per cent chance versus 76 per cent two weeks ago, and a “terminal” cash rate of 3.27 per cent in June versus 3.6 per cent now.
But while the RBA doesn’t want rate cuts to look like a certainty, they probably haven’t finished.
Rather than return a single-minded focus on inflation at its meeting last week, the board repeated its more recent mantra that “maintaining price stability and full employment is the priority”.
HSBC chief economist Paul Bloxham – a former RBA insider – noted that the central bank’s language has “swung around a lot” in recent months.
“In February, it cut but was hawkish; in April it held steady and was hawkish; in May it cut and was dovish, with talk of a possible 50 basis point cut,” Bloxham said.
There’s also some disagreement among economists about where inflation is heading.
Goldman Sachs chief economist Andrew Boak argued that market services inflation in August “appears broadly consistent with target inflation”.
Underlying inflation “continues to track in line with the RBA’s forecast”, according to Boak.
But ANZ’s head of Australian economics Adam Boyton was more cautious, upgrading his forecast for September quarter inflation and pushing back expectations for the next rate cut to February.
“We remain of the view that a final easing to 3.35 per cent remains more likely than not, although the decision now appears to be between one rate cut and no additional easing,” Boyton said.
CBA’s Belinda Allen said that given the cautious and gradual easing cycle so far, the RBA will wait for signs that inflation continues to head towards the mid-point of the target band before easing more.
The Reserve Bank’s caution is understandable.
Central banks around the world have learned painful lessons about declaring victory over inflation too early. Then again, the US Federal Reserve remains well and truly in rate-cutting mode.
If the Australian dollar rises because of US interest-rate cuts, it could eventually reach a point where it starts to reduce import prices enough to lower the RBA’s inflation forecasts.
But the shift in tone from the RBA leaves borrowers in limbo.
Many were banking on further relief from their mortgage payments as rates continued to fall.
The reality is that Australia’s rate-cutting cycle may be one of the shallowest on record.
Borrowers should not expect a return to anywhere near the ultra-low rates seen in the pandemic.
For now, the Reserve Bank appears content to wait and watch the data.
But with inflation still above their target range and some signs of economic resilience emerging, policymakers seem increasingly reluctant to provide more stimulus.
The message to borrowers is clear: don’t bank on much more help from lower interest rates.
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