Economists remain firm on rate cuts this year

On Tuesday (7 May), the Reserve Bank of Australia (RBA) announced that it would be holding the official cash rate at its current rate of 4.35 per cent, despite higher-than-expected inflation.

The RBA’s updated economic forecasts assume the cash rate will remain around its current level until mid‑2025 before dropping to 3.8 per cent by the middle of 2026. Previously, the forecasts had assumed the cash rate would remain around 4.35 per cent until mid‑2024 before declining to around 3.25 per cent by the middle of 2026.

Speaking at a media conference later that day, the governor of the RBA, Michele Bullock, said that the monetary policy board “did discuss the option of raising interest rates” but determined that the current policy setting was restrictive enough as it is.

However, she said that the central bank was not ruling out another rate hike in future.

She said: “We don‘t think we necessarily have to tighten again, but we can‘t rule it out. If we have to, we will. If we really think that inflation is going to be persistent and significantly above our forecast, we will tighten again.

“But the board made the judgement at the meeting that the right stance at the moment is to stay where we are and continue to observe what‘s going on in the economy. We‘re data-driven. And, as I said, we might have to raise, we might not.”

Despite the central bank leaving the door open for another rate hike to the cash rate, most lender economists remain of the mind that the cash rate would likely start falling later this year. However, there are still some saying rate hikes may come and as soon as June.

Cuts expected but risks building

ANZ economists Adam Boyton and Madeline Dunk said that the post-meeting statement was less hawkish than they had expected but that the near-term upward revisions to the inflation forecasts were larger than they had expected (ending the year at 3.8 per cent).

“We are conscious about reading too much into RBA forecasts and communication. Still, the combination of the less-hawkish-than-expected language in the post‑meeting statement and the larger-than-expected upward revisions to the RBA’s inflation forecasts over the next few quarters impl[y] the hurdle to another hike could be higher than markets have been expecting heading into this meeting,” they said.

“We continue to favour November for the start of the easing cycle, although the risks remain skewed toward that being delayed into 2025 and being shallower than we are forecasting (noting that we are only expecting three rate cuts in total).”

Similarly, Gareth Aird, the head of Australian economics at CBA’s global economics and markets research division, said he believed the RBA was retaining its “neutral bias”.

He said: “The RBA has retained its forecast for inflation to be back around the midpoint of the target band by mid‑26, as we anticipated,”saying that “incredibly strong net overseas immigration has put upward pressure on some components of the CPI basket”, which have in turn “made the RBA’s task of returning inflation to target a little more difficult”.

The CBA economist said the bank’s base case is for the cash rate to be “gradually cut from November 2024 to reach 3.10 per cent at end‑2025”.

Meanwhile, Westpac’s chief economist Luci Ellis said the RBA had “strengthened its rhetoric around upside inflation risks” and that “the more forward-looking indicators in the RBA’s suite have eased more than lag indicators, such as the unemployment rate”.

“The forward-looking parts of the statement continue to emphasise that the Board is not ruling anything in or out in terms of future policy. While there have been upside surprises in recent inflation and labour market data, these occurred in a context of weak domestic demand and a trajectory for inflation that is still clearly downwards,” Ellis said.

“Overall, we see the policy decision as poised. As the Governor noted in the media conference, it is hoped that they will not need to raise rates further, but they will act if needed. Likewise, our house view is that the most likely outcome is unchanged rates for a period, but further upside surprises will change the calculus.”

AMP’s chief economist Shane Oliver said that while he thought the RBA was holding a neutral bias, the language was more hawkish.

Oliver said that, while the risk of another near-term rate hike was “significant”, AMP continues to see rates as having peaked.

“However, the road to rate cuts will likely remain bumpy and while our base case is now for the first cut to come at year end, the risk of another rate hike in the near term is significant as is the risk of a further delay in rate cuts into next year,” he said.

“Apart from inflation the RBA will be looking closely at: whether next week’s Budget adds extra stimulus into the economy for the next year or so; the impact of the 1 July tax cuts on consumer spending; and the size of the rise in minimum and award wages granted by the Fair Work Commission in its upcoming decision.”

Rate hikes could come in June: Judo Bank

However, Judo Bank’s chief economic adviser Warren Hogan remains the outlier, maintaining his reading that rate hikes are imminent.

“[The RBA] statement, forecast upward revisions, and accompanying press conference have increased the likelihood that the next rate move will be up,” he said.

“Given that they have said there is no room for pushing out the timing of when inflation returns to the target band, they could not make upward changes to the 2025 and 2026 forecasts without triggering a policy response, i.e., a rate hike.

“We maintain our view that the RBA will increase the cash rate in August and September and are a little more confident of this view following the RBA’s communications.”

However, the Judo Bank economic adviser has said that the June rate decision may be for a rate hike.

Hogan said: “In light of the fact that the board is clearly talking about upside risks to inflation, there is even a chance that they could raise rates at the next board meeting in mid-June,” he said, flagging that if employment grew by more than 15,000 a month – or if there is a higher-than-expected Wage Price Index next week – the “risk of a June rate hike will rise.

“The reality is the RBA board will only hike rates if they absolutely must. This means that the case will have to be strong and based on both stronger employment and higher inflation.

“Their communications ... suggest they are more worried about the upside risk to inflation than the downside risks to the economy, as we believe they should be. We are seeing record population growth yet experiencing 50-year lows in unemployment. The notional demand for labour reflects a powerful excess demand for labour across the economy.

“We remain of the view that the most likely path for the economy and inflation will result in a small further adjustment in rates later in the year.”

[Related: ‘We might have to raise, we might not’: Bullock]