CBA pushes back rate cut forecast

The ASX Rate Indicator Index showed a 90 per cent expectation that the cash rate will remain at 4.35 per cent this month, with the remaining 10 per cent backing a decrease to 4.10 per cent.

All major banks expect the RBA to hold this month, with ANZ saying it thinks the RBA will consider a hold or a rate hike this month, but is likely to leave the cash rate on hold at 4.35 per cent.

When will the RBA cut rates?

While the September decision is widely expected to see no change to the cash rate, fewer people are expecting that the cash rate will drop in November 2024 (which will mark a year since the cash rate last moved.

None of the major banks now foresee a November rate cut, for example.

CBA is the only major bank that is forecasting a rate cut this year, but it has now pushed out its timing for the first rate cut from November to December.

The change in forecast comes off the back of stronger-than-expected employment data.

On Thursday (19 September), new employment figures released by the Australian Bureau of Statistics showed that the number of unemployed people fell by around 10,000, while the number of employed people grew by around 47,000 in August.

This resulted in the unemployment rate remaining steady at 4.2 per cent and the participation rate remaining at its record high of 67.1 per cent.

As such, while CBA’s head of economics Gareth Aird maintained that the easing cycle would commence in the final quarter of 2024 (partly in anticipation of the next monthly inflation indicator, expected on 25 September, showing a ‘material’ drop to 2.7 per cent), he said on Thursday that “the recent strength in employment growth coupled with still relatively hawkish rhetoric from the RBA Governor means we now see December as the more likely month for the start of normalising the cash rate”.

NAB, Westpac, and ANZ, however, don’t expect the RBA to start its easing cycle until next year.

ANZ has pencilled in the first rate cut for February 2024, but said that “the risks look to have tilted to a later rather than an earlier start, particularly given the current momentum in the labour market”.

Westpac also pushed back its cash rate call to 2025 last month, with the major bank’s economics team expecting the cash rate to start falling in February to 4.10 per cent before reaching a low of 3.35 per cent by December.

“Consistent with our earlier forecast, the trajectory of rate cuts is expected to be tentative and conservative, at one 25 basis point cut per quarter,” Westpac’s chief economist and former RBA member Luci Ellis said.

NAB’s economics team is also expecting rate cuts to come in the first half of the calendar year. While it suggests that May would be the likely month for a rate cut, it said that “anytime from February” would be viable, depending on the data flow.

It expects the RBA will end up around the 3 per cent mark in either late 2025 or early 2026.

Will the Fed decision to cut rates influence the RBA?

Outside of Australia, other similar economies have begun their easing cycle for the first time since the pandemic.

The Bank of England cut interest rates to 5 per cent at its August meeting for the first time since 2020 and on Wednesday (18 September), the US Federal Reserve dropped its interest rate for the first time in four years, shifting its target range down by 50 bps to a 4.75–5 per cent range.

The Federal Open Market Committee decided to drop its interest rate range this week after indicators revealed that the US economy was expanding steadily (though job growth had slowed and unemployed had ticked up) and that inflation was making “progress” toward its 2 per cent objective.

Despite the change in the cash rate in the world’s largest economy, ANZ’s economics team said it didn’t believe the Federal Reserve’s decision would “directly influence” the RBA’s decision, flagging that the RBA governor had previously emphasised that the key to achieving the full employment part of the RBA’s mandate is achieving price stability.

“This could be read as drawing a distinction on where the RBA sits on its path towards achieving its mandate (inflation still too high) relative to the Fed (inflation low enough that its focus has shifted to the labour market),” the ANZ team said.

“Even if the Fed’s decision … results in a stronger-than-otherwise AUD over the coming months, the RBA is unlikely to be concerned by this. If anything, this could be viewed as helpful, given that goods price disinflation in Australia has lagged other countries.”

Similarly, CBA’s Aird said: “The RBA will generally run its own race when it comes to monetary policy in Australia. But the trajectory of the US unemployment rate has been very similar to the unemployment rate in Australia...

“The US FOMC is seeking similar objectives to the RBA of returning inflation to target while preserving as many gains as possible in the labour market (i.e. promoting ‘maximum employment’ as it is expressed in the Fed’s modern statutory mandate). So the RBA will not want to be too far behind the curve when it comes to easing policy compared to the US Fed.”