One of the big four banks is still predicting an interest rate cut in 2024, as the chief economist from Australia’s central bank defended its decision to keep the cash rate on hold while “people were struggling”.
The Reserve Bank on Tuesday left its cash rate unchanged at 4.35% for a sixth meeting in a row, with its governor, Michele Bullock, warning “a near-term reduction in the cash rate doesn’t align with the board’s current thinking” and that inflation remained too high.
Before Tuesday’s decision, Westpac and Commonwealth Bank were forecasting a rate cut in November. ANZ and NAB, the other two big banks, were predicting the cut would come in February and May, respectively.
Luci Ellis, formerly RBA chief economist and now head of Westpac’s economics unit, now says Bullock’s “surprisingly hawkish” comments mean “our expectation of a November rate cut is unlikely to be achieved”. Westpac is currently reviewing that call.
CBA, though, has retained its November cut prediction, saying conditions are “finely balanced”.
“We have a lower track on inflation than the RBA and slightly quicker lift in the [unemployment rate],” said Gareth Aird, CBA’s head of Australian economics.
“If their forecast comes to fruition, rates should remain on hold this year.
“But if inflation falls a bit quicker and the [jobless rate] lifts more materially then cuts should come on to the table.”
Next week’s release of the June quarter wage price index and July labour market data are “going to be critical in all of this”, he said.
The Australian Council of Social Service said it was surprised the central bank had signalled an unwillingness to cut interest rates at this time.
“Real incomes and job opportunities have declined for two years now and there’s a risk the downturn will deepen,” said the Acoss chief executive, Edwina MacDonald.
The chief economist at the RBA, Dr Sarah Hunter, was asked about those who did not have a financial buffer at a Senate hearing into the cost of living on Wednesday. Hunter said the bank was “very conscious of them” but the RBA’s decisions were made based on the bigger picture.
“In the aggregate data, we know there are other people that are perhaps able to make a different choice about what they do with their income,” Hunter said.
“For some people, higher interest rates are actually a good thing. They get some more income, maybe they don’t have a mortgage, so they’re not paying mortgage interest costs.”
Hunter said it could be hard to hear, but the bank’s job was to “set policy for everyone”.
“We’re setting policy for the whole and that’s what’s really, really challenging because we know about the group that are struggling and it is really difficult to hear their stories and to know what’s happening to them,” she said.
The treasurer, Jim Chalmers, said measures in May’s federal budget – such as $300 energy bill rebates for households – were still taking the edge off inflation but admitted it would take time for it to return to within the 2% to 3% target band.
“There’s nothing artificial about helping people … with their cost of living pressures,” he told ABC Radio on Wednesday.
“The Reserve Bank’s near-term inflation forecasts are better, not worse, and that’s because of the design of our cost of living policies.”
AMP’s Dr Shane Oliver told the Senate inquiry he believed the RBA “would probably be a lot closer to that if they didn’t revise their growth forecast”.
“Why did they revise up their growth forecast? Partly because they got stronger public spending numbers in there,” Oliver told the committee.
The RBA lifted its forecast growth rate of public demand to 4.3% by December, 2.8 percentage points higher than its projection made in May.
Oliver said he was “surprised” by Bullock’s “lean” towards “hawkishness” in her Tuesday comments, and her references to demand being too strong.
“It’s hard to say that’s consumers, because demand, right there, is close to zero,” he said.
“There’s other things in there as well, but I have a feeling that if we had, say, a lower growth in [state and federal] government spending, the Reserve Bank would either be considering cutting, or much closer to cutting [rates].”
Hunter said while government spending was part of the board’s deliberations, it was not the sole consideration.
“The governor has said multiple times just in the time I’ve been in this job, the decisions for government are tough,” she said.
“They’ve got lots of competing priorities and they’re setting policies are cognisant of all of that.”
