While rates for Aussie homeowners remain firmly on hold, despite encouraging progress on inflation, Bendigo Bank’s Chief Economist, David Robertson says rate relief is finally becoming more imminent.
In his economic outlook for the last quarter of the year, Mr Robertson says Australians should be optimistic about the final three months of 2024, forecasting:
- Interest rates to remain on hold, but closer to rate cuts early to mid-next year (February or May);
- A firmer Aussie Dollar thanks to more US rate cuts, advancing above 70 cents;
- A slight uptick in unemployment as tight labour markets gradually ease; and
- Headline CPI settling below 3%, but underlying core inflation still above target around 3.5%.
“With markets receiving a boost from the latest monthly inflation indicator, where headline CPI fell to 2.7% - this fall in CPI and core inflation bodes well for Q3 CPI data, released on October 30,” Mr Robertson said.
“Thankfully, the latest RBA policy meeting no longer considered a rate hike as an option - aligned to our view since January that the RBA would be on hold for all of 2024.”
“As a result, we predict the first rate cut here in Australia to occur by May 2025, with a strengthening case for February next year.”
“Variables remain, however, when it comes to how quickly Australian’s will see that illusive first rate cut. The first being the pace of inflation moderating. The second, what the impact of tax cuts and cost of living measures are on household demand. Thirdly - labour markets.
“Our unemployment rate remained at 4.2% seasonally adjusted in August (and 4.1% in trend terms) with a record number of Australians employed and a record high participation rate, so our tight jobs market is a major factor. Australia has a higher vacancy to unemployment ratio than comparable economies, so labour shortages and demand for labour is yet to recede as it has elsewhere; although from here, a falling job vacancy rate should align to a gradual uptick in unemployment,” Mr Robertson said.
“The strength in labour markets and ongoing population growth have shielded our economy from the full effects of higher interest rates and the inflation shock, and the latest spending data for August showed a rise in retail trade: although it was the warmest August since 1910, which appeared to bring forward a range of spring purchases.”
Mr Robertson has also predicted some good news for Christmas holiday makers, with rate cuts in the US strengthening the Aussie Dollar.
“As expected, the US Federal Reserve joined many other central banks cutting rates in September, although the size of the cut was larger than elsewhere at 50 basis points, with two more Fed rate cuts to follow by Christmas. Markets took this news as a sign that a US soft landing is on track, which helped stock markets back to record highs. Though, the widening of the conflict in the Middle East threatens to derail the rally, and uncertainty around the November US Presidential election continues to build.
“As a result of US rate cuts, we are predicting a firmer Aussie Dollar, advancing above 70 cents against the greenback,” Mr Robertson said.
“Should the RBA choose to cut rates in December, which is currently rated a 75% probability by the market, this would impact the Aussie Dollar - but our view is the RBA will be more patient and avoid the scenario of cutting prematurely and locking in a higher ongoing inflation rate, limiting the extent of further rate cuts.
“Approaching year end, offshore factors are also relevant for our economy. For example, the latest stimulus package announced in China, where authorities are supporting the Chinese property sector and the broader economy with aggressive monetary and fiscal policy support, which helped the Aussie Dollar to its highest level since February 2023.
“Looking elsewhere overseas, it is encouraging to see how many other central banks have achieved returning their inflation rate back to targets – some experiencing recessions in doing so – but all evidence that monetary policy and independent central banks do still work,” Mr Robertson concluded.
To watch David Robertson’s October Economic Update, please follow this link: October economic update.
