When Can We Expect to See Rate Cuts in Australia?

The Reserve Bank of Australia (RBA) recently held the cash rate steady at 4.35% for its November 2024 meeting, marking a year since the last adjustment. Many Australians are eager for relief from elevated rates, wondering when rate cuts might come. The RBA’s approach, which balances inflation control with economic stability, suggests that while rate cuts may eventually come, they are likely several months off. Here’s what to expect.

The RBA’s Stance on Rates: A Cautious Path Forward

Despite a slight decrease in headline inflation—falling within the RBA’s target range of 2-3% at 2.8%—underlying inflation remains higher, hovering at around 3.5%. The RBA projects that inflation will likely stay above target until 2026, suggesting no urgency to cut rates in the immediate future. Rather than acting hastily, the RBA’s decision to hold rates at 4.35% reflects its intention to keep monetary policy restrictive until there is confidence that inflation is on a stable downward trend.

Economic Growth and Employment: Balancing Act

Australia’s economic growth remains subdued, largely supported by population growth rather than increased productivity or consumer spending. Although growth is slow, the labor market remains tight, with an unemployment rate of around 4%. However, the RBA projects a gradual rise to 4.3% by year-end and possibly 4.5% by the end of 2025. A slight increase in unemployment could signal less pressure on wages, which in turn may ease inflation. Still, the RBA is likely to wait for these projections to solidify before making any rate adjustments.

Financial Market Expectations: Spring 2025 or Later?

Most economists and financial market analysts anticipated the RBA’s decision to hold rates in November, but they are looking ahead, wondering when cuts may begin. Projections now suggest that the first rate cut might come around May 2025, but this could be pushed later depending on economic data. A more conservative outlook suggests that rate cuts might not occur until inflation approaches the midpoint of the RBA’s target range.

Key Factors That Could Influence the Timing of Rate Cuts

The RBA will be closely watching several factors as it considers future policy shifts:

1. Inflation Trajectory: While headline inflation has moderated, underlying inflation remains a concern. Sustained downward movement in core inflation would increase the likelihood of rate cuts.

   
   

2. Labor Market Conditions: Rising unemployment, especially if it surpasses RBA projections, could indicate a softening economy, prompting a reassessment of monetary policy.

   
   

3. Global Economic Trends: Economic slowdowns in major economies could indirectly impact Australia’s economy, potentially leading the RBA to consider supportive rate cuts sooner.

   
   

4. Housing Market: High rates have already led to a softening in housing prices. Prolonged declines could put additional pressure on the RBA to ease rates to support the property sector.

   
   

5. Household Debt and Spending: With many Australians stretched by high-interest payments, a notable decline in consumer spending could accelerate the RBA’s move to cut rates, though the RBA will likely act cautiously to avoid reigniting inflation.