First rate cuts in 2025 – market economists

The Reserve Bank did as expected and left interest rates on hold at 4.35% and market economists expect more of the same to see out 2024.

In its statement issued yesterday the bank said that inflation had fallen substantially since its peak in 2022 but was still some way above the midpoint of the 203% target range.

It said that the outlook remained highly uncertain and that returning inflation to target remained the priority.

The RBA’s decision elicited little surprise from market economists and analysts with State Street Global Markets head of APAC Macro Strategy, Dr Dwyfor Evans saying references to a highly uncertain outlook and not ruling any policy stance does not necessarily exclude another hike, but references to weaker growth indicate that the bias towards the next move will be to the downside, pending sustainably lower inflation.

“As things stand, inflation remains uncomfortably high relative to target, with the PriceStats online inflation index running at levels seen in 2022 rather than the slightly more constructive trend of 2023,” he said.

“Put simply, the RBA will continue to sit on its hands and with only two more meetings in 2024, it is conceivable that rates remain on hold for the rest of the year with a potential ease coming early in 2025 should trends prove supportive.”

Insight Investment portfolio manager, Harvey Bradley said domestic activity and labour market data has continued to be robust, which negates the need for the RBA to join developed market peers in cutting policy rates, most notably the Federal Reserve who kicked off their cutting cycle with a 50bps move earlier in the month.

“We continue to think that the RBA will be the last developed market, with the exception of Japan, to cut policy rates in this cycle. In part, this is because the RBA were more cautious than other central banks in the hiking cycle and did not take policy rates to as restrictive levels as peers.”

“Our base case remains a first cut in 6 months’ time, followed by a further 50-75bps in 2025 to take the policy rate towards a neutral level,” he said.

Vanguard senior economist, Grant Feng said that to tame inflation an extended period of suppressed demand is needed to weaken economic growth and that a focus on productivity-enhancing reforms that strengthen the supply side would be the most effective way to facilitate disinflation