Will interest rates go up or down? Economists issue shock warning
Australians have been urged not to go into further debt until the inflation picture becomes clearer with economists divided about what direction interest rates will go ... and a hike on the cards.
Economists are divided on what direction interest rates will go after Wednesday’s shock inflation figures as the federal government comes under fire for high spending and public sector job growth.
After yesterday’s CPI results delivered another blow to families already struggling with mortgage payments, rising power bills and a cost-of-living squeeze, economists are split over the Reserve Bank’s next steps, advising consumers to avoid going further into debt until the picture becomes clearer.
NAB Chief Economist Sally Auld said the economy has seen a ‘soft landing’ but warned there is a possibility rates will rise in the new year.
“With growing evidence that the economy is close to bumping up against capacity constraints, we are confident in calling the RBA easing cycle as over,” she said.
“But the soft landing dictates that any acceleration in growth and/or a tightening of the labour market from here will likely force the RBA to contemplate the need for rate hikes, possibly as soon as the first half of 2026.”
Betashares chief economist David Bassanese maintained his forecast the RBA will cut in the new year if the inflation rate eases as the government hopes.
“I’m still counting on a rate cut in May, assuming the annualised rate of underlying inflation in the monthly CPI reports drops to under a 3 per cent pace by then,” he said.
Westpac senior economist Justin Smirk was even more bullish, predicting two 25 basis point rate cuts next year.
“We actually forecasted an annual rate of 3.9 per cent and it came in slightly softer than that. So it was broadly around our expectations which is perhaps one of the key reasons why we haven’t changed our view of two rate cuts starting in May,” he said.
KPMG chief economist Dr Brendan Rynne said rate cuts next year will be important for the economy and the RBA needed to act once inflation came down.
“We strongly disagree with suggestions that the next rate movement will be upward. We believe that interest rates are currently sitting in a slightly contractionary position, and it would be beneficial for the economy for them to come down,” he said.
“Our previous expectation was that there was probably 50 basis points – two 25 basis point cuts – that could be taken out of the current cash rate to help stimulate the economy. While we are uncertain if two cuts are likely, we might see one more cut.
“The business side of the economy is still very weak.”
Mr Bassanese also warned Canberra must show more fiscal discipline, saying “the government needs to keep a rein on public spending, including major social programs and large infrastructure projects that add to capacity pressures”.
“Strong public sector wage growth is also contributing to inflation,” he said.
Westpac’s Justin Smirk added structural reform, not day-to-day budget tweaks, would be most effective and called for better planning systems, clearer regulation and faster market responses to ease bottlenecks.
“The most important thing the government can do is get out of the way of what makes businesses run smoothly,” he said.
He warned cutting government spending may not be the cure to inflation, saying public spending is largely propping up the domestic economy.
“Government spending is running a bit stronger than what you would expect, but you’ve got to be sort of very cautious here because it’s part of what’s holding up current demand as well,” he said.
Despite demand being strong across the economy, the pinch isn’t being felt equally, Mr Bassanese said.
Older Australians who are net savers benefit from higher interest rates, while younger borrowers are bearing the brunt of both higher interest rates and cost-of-living pressures.
Mr Smirk pointed to Westpac’s latest sentiment survey where those who had paid off their homes were happiest, while those renting or paying a mortgage were more pessimistic than optimistic.
“Those people who own their homes are actually enjoying life,” he said.
Dr Rynne said the wealth gap has widened sharply since the pandemic. “If you owned a home going into Covid you are by far a very strong beneficiary of wealth growth. If you did not own a home you have been left behind.”
For households and small businesses looking for interest rate relief, options remain limited for those who missed the prime time to make a switch.
“Shopping around for better rates can help at the margins, and for heavily indebted households that margin does matter – but it’s not always enough to justify the cost and hassle of switching banks,” he said.
Mr Bassanese said borrowers with existing debts can do little beyond shopping around for better deals and avoiding new loans.
“Shop around and ensure they are getting the best deal possible at least,” he said.
“Think twice about taking on more debt as there is a risk interest rates won’t fall much further and may actually need to rise.”
Mr Smirk added: “There is no real magic pudding. It is really about getting back to basics of how you spend, what you spend on and what your targets are.”
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Originally published as Will interest rates go up or down? Economists issue shock warning
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