BILL’S BITES: RBA rate cuts could begin next August

The Reserve Bank’s decision to hold the cash rate at 4.1 per cent at its September Board meeting had been widely expected., including by Westpac economists. 

If anything, the RBA sounded a little more confident that inflation was under control, and less concerned about the tightness in the labour market. 

Governor Philip Lowe also noted increased uncertainty around the outlook for China’s economy, which is highly relevant for Australia given China’s importance as our biggest trade partner. 

All this gives us more confidence that the RBA is going to remain on hold for quite some time.

Importantly, we’re in the peak period where the low fixed-rate mortgages people took out in 2020 and 2021 are rolling off into much higher variable rates. That means the average mortgage rate will continue to rise over the next six months or so, even with the RBA likely to keep the cash rate on hold. 

In terms of rate cuts, we don’t think they’ll come until the Board meeting in August next year. By then, we expect inflation to have eased to around 3.4 or 3.3 per cent, while unemployment will have risen from 3.5 per cent to 4.5 per cent. 

Rate cuts will come even sooner in the U.S., where we expect the Federal Reserve to begin easing policy in March next year.

However, we also think the pace of Fed rate cuts will be slower than it has been in the past. With that in mind, we’ve scaled back our expectations for a stronger Australian dollar in 2024, and now see it ending next year around 70 cents to the U.S. dollar, down from 74 cents seen previously. 

For this year, we believe the Aussie will end up around 66 cents, down from our earlier forecast of 68 cents.