It's been a tumultuous week for global markets and geopolitics as the US election came to a head, and we had a very predictable outcome from the RBA in their November policy meeting.
And there's some good news ahead for Australia, according to David Robertson, Chief economist of Bendigo Bank, who, in his latest report, predicted Aussie homeowners should expect a rate cut within the next six months., but not as soon as February as some other banks are predicting.
Mr Robertson explained:
“The RBA easing cycle remains on track, but still appears most likely to start around May,”
“Unfortunately for Aussie homeowners, there doesn’t seem to be a Christmas surprise in store, with no real prospect of a cut this December. And even a cut in February will need several factors to fall favourably.”
“At this stage, we are predicting an interest rate of around 3.5% this time next year, potentially resulting from a 35-basis point cut in May followed by two quarter per cent reductions thereafter.
“While the Reserve Bank predictably stayed on script this week, holding cash rate at 4.35%, the election of Donald Trump as US President is set to shake up global markets and geopolitics,” Mr Robertson said.
“With the return of President Trump, we will likely see an impact on exchange rates via higher bond yields, with markets expected to rethink the depth of easing cycles ahead,” Mr Robertson said.
“The US Federal Reserve is still expected to cut interest rates later this week by 25 basis points, but the Trump victory, with his commitment to ramp tariffs and cut corporate tax rates may limit the ability of the Fed to keep cutting rates back to more neutral levels.
So, the Aussie Dollar, having reached a high of around 69 ½ US cents a month ago is sharply lower, well below 66 cents. How this all plays out will depend on who will control Congress and how quickly changes to US trade and fiscal policy will be implemented, but the immediate market reaction of a stronger US Dollar, higher bond yields and still near record highs for stock markets are adding to market volatility.
“The consequences for geopolitics and global trade will no doubt take longer to become clear,” Mr Robertson said.
“Back here at home this week, Michele Bullock again made it clear that while progress with moderating inflation is continuing, the RBA still don’t expect underlying inflation to sustainably reach their target until 2026.
“A range of factors remain in play for this timing, and by their own admission the RBA see these factors as uniquely uneven and unpredictable, meaning they don’t yet have confidence to start easing rates and will need plenty of fresh evidence before doing so,” Mr Robertson said.
“As a result, the market yield curve is now fully pricing an RBA rate cut by May 2025, but with only around a 40% probability by February, which matches our unchanged view that May is more likely, but also is a good reminder the easing cycle is still on track, especially after the latest inflation numbers.
“The Consumer Price Index is down to 2.8% year-on-year, based on the third quarter data as expected. But core inflation, which doesn’t benefit from energy rebates and other cost of living measures, is still up at 3.5% - well above the 2-3% target band, which explains why the RBA can’t reduce rates just yet.
“But we should be there by mid-next year, and the latest monthly data showed even faster progress, with CPI down to 2.1% and core inflation down to 3.2%.
“The next set of quarterly figures, expected in late January, will be the next big test for the RBA to reduce rates sooner than May. With third quarter core inflation at 0.8% for Q3, the RBA will want to see a 0.5% number or lower for Q4, to get annual core inflation anywhere near 3% and therefore cut rates in February 2025.
“Of course, there are other factors to consider that will be highly influential, including the path ahead for jobs. Tight labour markets remain a two-edged sword. We have a remarkably resilient, low unemployment rate and still labour shortages, but a lower unemployment rate than the RBA would consider consistent with relaxing policy while inflation is above target. So, a rise in unemployment between now and February would change this equation.
“Job vacancies have been weakening, so the unemployment rate would normally rise as a result - but this correlation is yet to emerge. The Reserve Bank’s latest forecasts only have unemployment rising to 4.3% in the coming months and then no higher than 4.5% for two years, while our forecasts have a sharper rise to 5% over the next 12 months.
“Several other factors for our economic outlook and for the path of official rates come from overseas, including the recent stimulus package announced in China, together with some improved economic data from the region,” Mr Robertson concluded.
