Don’t believe the hype. A barrage of rate cuts is coming.
Markets have been all over the shop the past few weeks. Less than two weeks ago, markets were looking for a rate hike at the RBA’s meeting in August.
Now, it’s nothing but cuts, with four rate cuts priced in out to the end of 2025.
That has us lagging the rest of the developed world (apart from Japan who hiked last week – though they still had official interest rates at 0%!)
You can probably blame most of that on the ongoing energy shock, as we continue to create an artificial gas shortage at home by exporting gas to China and Japan. Talk about an own goal!)
But with the energy shock rolling on, and rents remaining elevated, markets think the RBA has less room to move than other central banks.
And that might be true. But while inflation might be a bit sticky, our economy is slowing just as fast, if not faster, than our developed economy peers.
And this is why the economists at the Commonwealth Bank are looking for even more rate cuts out of the RBA.
They’re currently expecting the first rate cut to come in November, and for the RBA to then deliver five rate cuts out to the end of 2025.
The argument the CBA is making is that the economy is much weaker than the headline figures suggest. Central to that argument is the chart here, showing that Australia’s economy remains stuck firmly in a per capita recession following five consecutive quarterly declines to Q1 2024:
The amount of economic stuff we’re producing over all is increasing – the pie is getting bigger. But the population is growing even more quickly, which means that everyone’s slice of the pie is shrinking.
CBA also reckon with that weakness as a backdrop, all the indicators suggest that unemployment should lift quickly in the months ahead.
I don’t think you can argue with much of that. The only thing keeping rates up at the moment is the prospect that inflation might not be as dead as the RBA likes.
But if inflation were taken out of the picture, the economic outlook is screaming rate cuts.
Alex Joiner at IFM makes a similar argument, noting that the private sectors of the economy are already going backwards. Right now, the public sector is the only thing keeping the economy afloat:
It’s the same story with employment. The private sector has already started shedding jobs. Employment growth is entirely down to the public sector, and most of that down to the NDIS.
That’s not an economy that needs a restrictive level of interest rates. It’s not an economy that needs the current level of interest rates.
It’s an economy begging for rate cuts.
The only thing staying the RBA’s hand is that pesky inflation outlook.
That’s still uncertain.
But once that outlook clears, look out. Rate cuts will come quick and fast.
DB