RBA won’t cut interest rates until 2025

Former RBA official Jonathan Kearns said it would cut rates later than other central banks because it didn’t raise them as much.

“Monetary policy was less tight in Australia than it was in other countries, and so therefore the disinflationary impetus coming from monetary policy has been less,” the Challenger chief economist said.

“Inflation is largely services-driven now.

“If you think about what wage growth is in Australia [4.2 per cent], and what productivity growth is, based off that inflation is not coming back down to 2.5 per cent unless we get a fairly significant slowing in wages growth or increasing productivity growth.”

The European Central Bank and the Bank of Canada are tipped to move first, with markets fully priced for them to start easing cycles in July.

They are expected to be followed by the US Federal Reserve and the Bank of England in September, and by the Reserve Bank of New Zealand in October.

A delay in rate  cuts would make an early election unlikely – as the Albanese government hopes for multiple reductions before going to the polls.

But rate cuts by May next year are not a guarantee, with a handful of economists tipping a prolonged period of rates on hold, as well as the possibility of further increases.

AMP chief economist Shane Oliver said rate cut forecasts were more distant in Australia because inflation took off later than in other advanced economies.

The pass-through of the energy price shock caused by Russia’s invasion of Ukraine has also been more prolonged in Australia than overseas.

Australia isn’t the US

Markets pushed back expectations for rate cuts in Australia and America this week after US inflation accelerated to an annual rate of 3.5 per cent in March and core US inflation – which excludes the volatile food and energy categories – was a higher-than-expected 3.8 per cent.

But Dr Oliver said local markets had over-reacted to US economic news, predicting a rate cut in August or September, despite fears high inflation could prove sticky.

“I think investors appear to be assuming Australian inflation will go the same way as in the US,” Dr Oliver said.

“A big factor behind the upside surprise and US inflation in January and February … was owner-occupier rents. In the US, rents have something close to a weight of 35 per cent in the CPI [consumer price index], whereas in Australia it’s about 6 per cent.

“Even though rents are rapidly rising here, they’re not going to have anywhere near the same effect they have in the US.”

Dr Oliver also said households in Australia were feeling the pain of high interest rates due to the dominance of variable-rate loans, whereas consumers in the US were still “alive and well”.

Early cut still possible

While Australian households had cut back on spending, Westpac chief economist Luci Ellis said per capita consumption in the US was increasing, in large part because of the Biden administration’s loose spending.

“In the United States, the federal government is running a budget deficit of around 6 per cent of GDP, with no consolidation in sight or even being seriously discussed,” Dr Ellis said.

“Income tax brackets are indexed to the CPI, so American households are not seeing that drag from higher tax payments.

“Together with the fact that average mortgage rates paid have risen far less in the United States, macro policy is barely touching the sides for the US consumer.”

Dr Ellis said the Albanese government’s more prudent budget policy was helping the RBA to take heat out of the economy and negated the need for further monetary tightening.

“While there is still a body of opinion holding that the RBA will not cut rates until 2025, a number of customers overseas ... are more likely to ask what would trigger the RBA to cut rates earlier than our current call for a late-September timing,” she said.

The National Australia Bank business survey released this week showed falls in labour costs, purchase costs, and buying and selling prices, which Dr Oliver said implied a further decline in inflation in Australia.