Interest rate cuts could come much later than you think

Reserve Bank interest rate rises have piled on the pain for millions of households, and it may linger longer than you think.

Feeling pressure from interest rate rises? You’re not alone. Picture: iStock

Borrowers are waiting eagerly – and patiently – for the Reserve Bank of Australia to follow other countries with official interest rate cuts soon.

While the US, Europe, Britain, Canada and New Zealand have cut interest rates in recent weeks, our RBA looks likely to sit on its hands until early-to-mid 2024, economists say.

This may be worrying mortgage-holders who’ve been hit with 13 RBA rate rises since May 2022, and were told this time last year that Aussie cuts were likely around mid-2024.

Even more worrying is that there’s a chance that rate cuts may come later-than-expected or (gulp!) not at all next year.

While the RBA has taken rate rises off its immediate agenda, it’s still talking tough about making sure inflation keeps heading lower – and its only tool for ensuring that happens is keeping interest rates high.

Economic data is constantly fluctuating, and when coupled with global geopolitics and local Aussie politics, anything can happen. Here are five reasons why those hoping for rate cuts within the next six-to-nine months may be sorely disappointed.

1 STICKY INFLATION GETS STICKIER

We’ve heard a lot of talk about inflation remaining stubbornly high, and the official Aussie inflation rate is 3.8 per cent – well above the RBA’s target band of 2-3 per cent. Solid wages growth, strong demand and now a mini-surge in oil prices are factors likely to keep inflation higher than the RBA wants.

2 A PRE-ELECTION CASH SPLASH

Labor’s bid to win the 2025 federal election is likely to see it shower more money on households, as it did in this year’s federal budget.

While it argues it’s bringing inflation down with its policies, economists say the maths is simple: if you put more cash into peoples’ pockets, they will spend it, and more spending means more demand for goods, which can drive prices higher.

3 SURPRISING ECONOMIC DATA

Interest rate decisions are driven by data – primarily Consumer Price Index inflation, but the RBA also keeps its eye on unemployment, economic growth, retail sales and other Australian Bureau of Statistics figures.

Those figures don’t always say what the RBA, and the public, expects or wants. And they can be enough to keep interest rates higher for longer.

4 UNEMPLOYMENT STAYS TOO LOW

Australia’s jobless rate has been impressively low near 4 per cent, which is one of those surprising economic numbers mentioned above. This week it surprised again, remaining at 4.1 per cent when economists were forecasting around 4.3 per cent.

Households banking on an interest-rate cut need to be patient. Picture: iStock

Rising interest rates usually push people and businesses into financial stress and lift unemployment as inflation and the economy slows. When the RBA started raising rates in 2022 our jobless rate was 3.8 per cent, and for the five or so years before the pandemic it was 5-6 per cent, so the current unemployment rate certainly doesn’t scream “cut interest rates now!”

5 MIGRATION CONTINUES TO BOOM

In just three years Australia’s population has controversially jumped from 25.8 million to 27.4 million, according to the Bureau of Statistics.

That extra 1.6 million people – mostly through migration – has meant much more demand for housing and other everyday items, keeping prices higher in a whole range of areas. Population policies will be watched closely in the looming election campaign.